US dollar not in distress
LATELY the controversy about the role of dollar, as a global currency and investment in dollar-linked assets has gained momentum. Economists, business tycoons, bankers and intellectuals have expressed their views on this very important issue. Some predict a doomsday scenario on the future of the dollar while others, (majority I would say) disagree and express full confidence in the role of the dollar as currency of last resort and its continued dominance in the global economy. The dollar’s reputation as a safe haven in times of economic distress is a major factor though recession worries, especially in the Euro Zone, have soared in the past weeks as elevated inflation, mainly driven by higher energy and food prices, forces central banks globally to tighten their money taps aggressively. This has weakened their currencies, making the dollar stronger. But the rest of the world is left with less to grin about. Experts identified three main reasons that a stronger dollar could hurt countries around the world with smaller economies. It can add fiscal strain, it can affect global trade and it can slow growth, particularly in weak and fragile economies.
The US dollar is rising at a blistering clip, reaching its strongest level against other major currencies in almost two decades. That’s helpful for American tourists traveling abroad this summer. But on Wall Street, it’s growing cause for concern. “A very strong US dollar provides yet another headwind for earnings,” Morgan Stanley equity strategist Michael Wilson told clients this week. The US Dollar Index has shot up 4% in the past month and nearly 13% year-to-date, while other top currencies have suffered. The Euro has dropped 12% this year. Last week, it hit parity with the US dollar for the first time in 20 years as fears about the region’s economy — stoked by the Russia-Ukraine war — pushed investors to dump their holdings. The pound has retreated toward levels seen during the worst days of the pandemic.
The dollar’s ascent began in anticipation of interest rate hikes by the Federal Reserve, which make the United States a more attractive place to park cash. But in recent weeks, the dollar has dominated for other reasons.
First, there’s its reputation as a safe haven investment. When anxiety builds about the health of the global economy and the likelihood of a recession increases, investors rush to scoop up dollars as a store of value. Other traditional safe haven currencies aren’t getting the same boost. The Swiss franc is up nearly 8% this year. Japan’s yen has been volatile and recently hit its weakest level against the dollar since 1998. That’s in part because the US economy looks stronger than its peers, another major driver of the dollar’s climb. Europe is dealing with a growing energy crisis that could make it much harder for the European Central Bank to fight inflation. Some officials are worried that the crucial Nord Stream 1 pipeline from Russia to Germany, which is closed for routine maintenance, may not restart as normal later this month. That could force governments to make emergency interventions.
Gas shortage in the euro area has resulted in rationing supplies to industry, indicating economic crisis, says Jordan Rochester, currency strategist, recently. He predicted the Euro will keep falling. The United Kingdom, meanwhile, is paralyzed by high inflation and Japan appears to be locked in super-easy monetary policy opting to prop up the economy instead of putting a lid on price increases. What does it all mean? A stronger dollar gives Americans more spending power when they’re outside the country. But it’s not necessarily a good thing for stocks, since it eats into the value of Corporate America’s international sales and profits. US firms generate about 30% of their sales abroad. And at a time when they’re already dealing with the effects of inflation, extra inventory and shifts in demand patterns, will create additional drag. Dollar strength is just another reason to think earnings revisions are coming down over the next few earnings seasons, therefore, the recent rally in stocks is likely to fizzle out before too long.
One year ago, the Swedish payments firm, Klarna, was Europe’s hottest startup. It was valued at nearly $46 billion in June 2021 as consumers turned to online shopping during the pandemic and embraced “buy now, pay later” services. A blockbuster initial public offering was in sight, promising a windfall for high-profile backers including Soft Bank, Sequoia Capital and Silver Lake. Circumstances have since changed dramatically. Klarna announced last week that it had raised $800 million in new financing at a valuation of just $6.7 billion. That means 85% of its value has evaporated. Klarna and its investors said the broader market environment is to blame, not its business model. “The shift in Klarna’s valuation is entirely due to investors suddenly voting in the opposite manner to the way they voted for the past few years,” Sequoia partner Michael Moritz said. “Eventually, after investors emerge from their bunkers, the stocks of Klarna and other first-rate companies will receive the attention they deserve.”
Klarna now has 150 million users worldwide, almost 30 million of which are in the United States. But in recent months, investors have become skeptical of the fast-growing tech companies they once loved. Instead, they’re doubling down on firms that consistently generate profits. That’s not Klarna. The company, which has reported steep losses, recently and announced it was laying off 10% of its workforce in May. The simple fact is that the US dollar will continue to be the leader of world currencies due to “protection” it receives from the largest economy of the world and superpower which “manages” the global economic and political systems according to its needs, exigencies and expediencies. History is the witness that it survived the Great Depression, more recently the 2008-2012 financial crisis, Covid-19 and the aftermath we are witnessing today in the shape of unprecedented and uncontrollable inflation and economic turmoil, almost every country is going through, presently.
—The writer is Former Civil Servant and Consultant (ILO) & International Organization for Migration.
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