The 12 members of the Federal Reserve’s rather dull-sounding Federal Open Market Committee (FOMC) have considerable sway over the global economy through their pulling of the levers of US monetary policy. The central bank’s vice-chair, Lael Brainard, nodded to this in a September speech in New York when she linked higher US rates to “cross-border spillovers and financial vulnerabilities” in other parts of the globe.
The evidence is clear on this point - both in 2022 and throughout the 50 years since the dollar was delinked from gold in 1971. This year, as US rates have risen to combat soaring inflation, capital has flowed away from less stable emerging economies and towards the US, helping lift the dollar's value against a basket of other currencies to its highest level since the turn of the millennium. Emerging markets specialist Ashmore’s (ASHM) shares are down by more than 40 per cent over the past 12 months as investors have fled riskier markets.
Emerging economies are more reliant on imports and many have significant dollar-denominated debts. A stronger US dollar makes financing more costly and pushes up the price of crucial imported commodities such as oil. IMF loans have reached a record high this year as economies such as Egypt and Pakistan have sought bailouts. Sri Lanka defaulted on its foreign debt in May, and S&P Global Ratings recently warned in its fourth-quarter outlook report on emerging markets that continued dollar strength “could fuel tensions and trigger social unrest, particularly for emerging markets with limited fiscal space or high debt”.