December 3, 2023

Strong Dollar Is Good for the US but Bad for the World

“You can see these very pronounced negative effects of a stronger dollar,” said Maurice Obstfeld, an economics professor at the University of California, Berkeley, and an author of the study.

Then there is a pile-on effect. Even in countries where inflation is not as high, central banks feel pressure to raise interest rates to bolster their currencies and prevent import prices from skyrocketing. Last week, Argentina, the Philippines, Brazil, Indonesia, South Africa, the United Arab Emirates, Sweden, Switzerland, Saudi Arabia, Britain and Norway raised interest rates.

Despite the pain a strong dollar is causing, most economists say that the global outcome would be worse if the Fed failed to halt inflation in the United States.

At the same time, the sweep of rising interest rates around the globe is causing concerns that central bankers might move too far, too fast. The World Bank warned this month that simultaneous interest rate increases are pushing the world toward a recession and developing nations toward a string of financial crises that would inflict “lasting harm.”

Clearly, the Fed’s mandate is to look after the American economy, but some economists and foreign policymakers argue it should pay more attention to the fallout its decisions have on the rest of the world.

In 1998, Alan Greenspan, a five-term Fed chair, argued that “it is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress.”

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