Expensive dollar stokes inflation fire

Tie! For the first time in XNUMX years, the euro is worth as much as a dollar. However, the rates of currencies from emerging countries fall much faster against the US currency. In more and more cases this will become a real problem.

Much has been written in recent weeks about the appreciation of the dollar and the US interest rate hikes behind that advance. However, much less attention is paid to the impact that the dollar rally has on the Dutch economy. The high petrol prices at the pump, for example, are usually attributed to the sharp rise in oil prices. For example, for a barrel of Brent oil, you have to pay close to $100 a barrel, compared to less than $75 at the beginning of December. So a price increase of 33% for oil. But in the same period, the dollar has also appreciated by more than 13%. This means that oil has become more than 50% more expensive expressed in euros. And that applies to all kinds of products and services that are traded in dollars.

Dollar fuels inflation
An expensive dollar thus fuels the already high inflation even further. But what is happening in the Netherlands and other countries within the eurozone is nothing compared to the pain emerging countries are feeling. The currencies of many of these countries have fallen much harder this year compared to the dollar. In some cases, the national central bank, like the US Federal Reserve, is working hard to raise interest rates. However, the increasing fear of recession is also having an impact on the currency world. The prospect of a sharp decline in economic growth in the United States and a possible recession in Europe as a result of the energy crisis means that many parties prefer to keep their reserves in hard currencies such as dollars and euros.

Big Losers
This year, many currencies of Eastern European countries are among the big losers. Partly due to the trade relationship with Russia and the geographical closeness to the Ukraine war, the Hungarian forint fell by 2022% in 21. For the Polish zloty it is 16% and the damage for the Czech koruna is 10%. The Turkish lira is also under great pressure. As a result of a runaway policy to contain inflation above 70%, the currency has fallen 24% since the turn of the year to its all-time low. Colombian peso also fell to a new low against the dollar: -9%. And the Argentine peso even dropped by 21%.

Growing pains in the emerging world
The above price declines reverberate harder for the countries concerned than the decline of the euro. It is becoming increasingly difficult for companies from emerging countries to attract new capital. Many companies issue loans in dollars. But due to the advance of the American currency, they are increasingly losing interest and redemption costs in their own currencies. This is an important reason why the World Bank has already revised the growth forecast for emerging countries in 2022 from 6,3% to 4,6%. If the dollar gains momentum, the emerging world's next growth setback is only a matter of time.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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