Project Syndicate: Strong Dollar Weakness

The US dollar gained more than 8 percent value for the year and shows no sign of slowing. US officials credit growing business confidence, but Benjamin Cohen, writing for Project Syndicate, credits rising interest rates for increased dollar demand. The rising dollar makes US exports more expensive, and new tariffs make imports more expensive, adding to inflation and prompting the US Federal Reserve to again hike rates. Cohen warns that “short-term movements in foreign-exchange markets are no way to judge a currency’s underlying strength.” Instead, “Longer-term trends in how a currency is used internationally – particularly as a store of value for foreign investors or central banks – are far more telling.” The rising dollar and US protectionist policies prompt emerging economies to seek substitute payment systems – China’s renminbi is gradually gaining favor, and India uses commodities for some oil purchases. As new alternatives emerge, the heavily indebted United States will lose its ability to spend freely and global influence. – YaleGlobal