Fluctuations in the U.S. dollar tend to have widespread global effects, and its potential strengthening under former President Donald Trump may pose significant challenges for the rest of the world, according to The Economist.
The index tracking major American companies reached consecutive records on November 6, 7, and 8, signaling investors’ optimism about Trump’s policies. They expect corporate profits to rise due to tax cuts and deregulation, although government borrowing is anticipated to increase sharply.
This combination of higher deficits and the resurgence of inflation could compel the U.S. central bank to keep interest rates elevated, even more so than under a non-Trump administration. The prospect of higher rates would make dollar-denominated investments more appealing, thus strengthening the dollar and boosting demand for it.
A stronger dollar could create difficulties for importers by raising costs, leading to reduced demand for foreign goods and shrinking global trade volumes. Countries that rely heavily on exports would be particularly affected, with Asia and Latin America expected to suffer the most.
A 2023 IMF study confirmed that, after a year, a 10% increase in the dollar’s value reduces output in emerging market countries by 1.9 percentage points. Dollar fluctuations affect the global economy through two main channels: trade and finance. More than 40% of global trade is conducted in dollars. A stronger dollar increases import costs, reducing demand for foreign goods and shrinking overall trade volumes. Therefore, in most Asian and Latin American countries, changes in the value of the dollar are more significant than movements in local currencies. A study published in 2020 showed that a 1% rise in the dollar’s value against all currencies predicts a 0.6% drop in trade volumes between countries and the rest of the world. The financial consequences of a rising U.S. currency are just as important as the trade impact. For countries and companies that borrow in dollars but have no sources of dollar revenue, a rising dollar mechanically increases their debt burden and raises interest expenses. Higher interest rates in the U.S., combined with a rising dollar, also make investments in the rest of the world less attractive. Capital typically flows out of emerging markets in such situations, forcing them to raise interest rates as well, tightening monetary conditions just when their economies may begin to suffer from an overall slowdown in trade, the publication writes.
