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“Doomsday loop”: will the dollar weigh down the global economy?

  • Post category:Economy News
  • Reading time:2 mins read

It hadn’t happened for more than twenty years: the dollar is stronger than the euro. Launched shortly before the Dotcom bubble crashed, the euro had slipped below the dollar before going back above it in 2003. Since then, it had always remained above it, before July 11, 2022. And the fact that it went back up this fateful bar is not good news.

As the formula says, “The dollar’s gain is the world’s pain”; the gain of the dollar is the pain of the world. The vast majority of international trade being conducted in dollars, and its appreciation against other currencies is ultimately bad news for the economy of the rest of the world.

Only, as Bloomberg points out, this does not mean that the situation is comfortable for the United States itself. In fact, inflation, which for the moment shows no sign of abating, combined with high commodity prices, poses the risk of what the magazine calls a “dollar doom loop”: a monetary vicious circle.

Apocalypse Loop

A strong dollar lowers global industrial production, which weakens trade, and therefore raises concerns about global growth. This concern in turn puts pressure on other currencies, which further strengthens the dollar. And so on: the loop seems endless.

This is of course not the first time the dollar has strengthened in this way. The American currency had periods of rise in 2016 and 2018, but each time the Central Bank (FED) managed to keep control and stop inflation before it rose too much.

However, according to Bloomberg, the problem in 2022 is that the FED is already fighting with all its might against rising prices by raising its interest rates, so far without success.

For Jon Turek, a financial analyst interviewed by Bloomberg, “What makes this version of the vicious cycle particularly frightening is that it is quite difficult to see how the [politiques faisant office de] circuit breakers will be able to play their role in the short term.”