Written by Yuhua Zhang, GEI Associate
The US dollar index growth in 2015 was about 9% which is the most rapid appreciation since 1985. With the Federal Reserve’s forward guidance of continuing rate increases, it is not a stretch to believe that the US dollar will continue to appreciate against other main currencies.
Particularly, currencies of emerging economies will sustain intense impact by stronger US dollar. The Chinese Yuan, as a typical instance, depreciated to a five-year high of 6.64 against USD in January. The stronger US dollar likely will bring significant change to global capital flow directions, commodity prices, and degrade many economies.
With the QE program of the Federal Reserve, emerging economies had increased foreign capital inflows using “borrowed” dollars. Mostly these dollars were converted into local currencies – but eventually these borrowings will need to be repaid by converting the local currency back to dollars. The current sustained strong US dollar is causing repatriation of dollars as the cost of a dollar based loan last year was well over 9% based on the appeciation of the dollar. The emerging economies are struggling under the weight of dollar based loans and the more the dollar appreciates, the more the global economy will slow.
A stronger US dollar will also bring higher default risk which may even spread to government and domestic banks. A strengthing US dollar will bring further headwinds to an already slowing global growth.
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