The US dollar takes the world on a journey – Manila Bulletin

To say that the US dollar has soared is an understatement. It’s become ballistic!

The US dollar sneezed and all other currencies not only caught a cold, they are now supported. Even the mighty British pound has fallen to once unthinkable parity levels against the US dollar. Of course, it can be argued that the pound’s fall is also due, in part, to recent fiscal policy pronouncements by newly installed Prime Minister Liz Truss. I think, however, that the tax measures were only an accelerator of what was already a definitive fall in the pound. Similarly, the Japanese yen has fallen to disconcerting levels approaching 150 yen per US dollar. The British and Japanese governments have taken the unusual step of intervening in the foreign exchange market to help stabilize the value of their currencies.

Obviously, the Philippine peso was not spared. A year ago, the peso was trading at around 50 to the US dollar. At the time of this writing at the end of the day, September 29, the peso was trading at 59.20 to the US dollar. This is a drop of nearly 20% in value. A hard and debilitating blow, especially for importers.

The fall in currencies against the US dollar was inevitable. The US Federal Reserve had to adopt a very aggressive interest rate policy to curb runaway inflation which peaked at 9.1% in June before falling back to 8.3% at the end of August. To contain the historic rise in inflation, interest rates have risen from near zero at the start of the year to 3% for the first time since 2018. And this is not the end of rate hikes. Forecasts indicate that it could climb to 4.4% by the end of the year, continuing to rise in 2023. The US Fed’s inflation target is 2%, so it still has a long way to go to achieve this.

Inflationary pressures are not expected to subside any time soon. It all started with supply chain disruptions resulting from the COVID-19 pandemic. This was then fueled by an increase in demand with revenge spending, an increase in employment and an increase in monetary circulation. The nail in the coffin, so to speak, was the Ukraine-Russo conflict. This is the most compelling pressure of all, as it is likely to drive up energy and grain prices. The effects were widespread and immediate, not creeping. As the conflict has no foreseeable resolution, it continues to fuel speculation and therefore imbalances in traditional supply and demand equations.

Sustained levels of high inflation and, therefore, interest rates will almost certainly push the US economy into recession. The Fed itself has admitted that there is no painless way to get inflation under control. He prefers to risk a recession rather than a second wave of rising prices which will be even more difficult to control in the future. Given the still high levels of interest rates in the United States, the flight to the dollar should remain vigorous. Therefore, other countries will have to raise their own interest rates to defend their currency. This leads to a downward revision of the global economic growth forecast for 2023.

The strength of the US dollar is an unintended consequence of their fight against inflation. They also fear they will nip their post-COVID economic recovery in the bud and slide back into recession. The rest of the world therefore has no choice but to defend itself and rely on its own internal remedies to reduce the impact of US monetary policy.

In the Philippines, the peso’s fall to record lows is of great concern due to our import dependency for many of our essentials – oil, food, medicine. Moreover, there is little underlying support for the peso since we do not have a large export base nor can we boast of foreign domestic investment (FDI). Tourism is still struggling to take off to bring in the foreign currency it so badly needs. Our most important safety net is our OFW currency remittances which, thankfully, are increasing in the last quarter of the year, in time for the holiday season.

What is crucial now is not how much further the peso – or other global currencies – will fall. The most important question is how fast he can recover. The strength of the US dollar happened so quickly that companies didn’t have a chance to fully digest it. Many companies have absorbed rising import costs hoping that exchange rates will stabilize. If currency destabilization spreads, the Philippines will need to implement more belt-tightening and currency controls. Hopefully the risk to our GDP growth will not be significant.

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