The U.S Dollar has risen impressively over the past year despite exogenous shocks and global economic uncertainties. Experts believe this is the outcome of a very definite macroeconomic strategy crafted by U.S policy makers, and the upward trend is likely to increase.
When a currency rises or falls relative to other currencies, it is usually the result of government policies, especially when the currency belongs to one of the more economically powerful countries like the United States. The trend following the global financial crisis has been what many have called the “race to the bottom”, where countries actually move to cheapen their currency in order to make export goods more affordable. This is part of a broader strategy to sell more exports, raise inflation moderately and spur economic growth. Many countries have plied this route, and continue to do so, in a bid to recover from crises, so it’s rather unusual that the U.S has set out on a different trajectory in recent times.
There are clear arguments however that support the case for a stronger dollar. A U.S. dollar that is increasing in value will draw global financial flows into the U.S., support the demand for U.S. Treasuries, and help keep the U.S. government’s borrowing costs low. Also – and this is only until any negative effects begin to manifest – a stronger Dollar will attract more money to the U.S. stock market. Obviously, these are clear wins for policy makers in the United States.
Mainstream economic theory suggests that investors will continue to race to countries that show faster growth and development, and this is usually facilitated by buying the currency of that economy. As investors buy more dollars in order to invest in the relatively strong U.S economy, we can expect to see a stronger dollar, at in the near future. This also means the demand for the dollar will increase, a sure driver of strength, though exports could be hurt in the process.
“While a rising dollar keeps import price pressures low and hurts export competitiveness, the U.S is a fairly closed economy. That is, dollar movements have a fairly small impact on import prices and export activity. There is a much more elastic relationship between global growth and exports than the relative value of the dollar,” says Neil Dutta, head of Economics for Renaissance Macro Research.
So what does all this mean to developing African economies?
First off, economically weaker countries will continue to be at the mercy of the larger and stronger economies. As the U.S tightens and loses its monetary policy in line with its overall macroeconomic objectives, African economies will have to continue adjusting accordingly. Similarly, exports from the U.S will continue to cost much more than they did at the beginning of 2014. Importers are already feeling the heat and, as is always the case, the brunt has been passed on to the African consumer.
Thirdly, and very significantly, oil price drops will likely continue until such a time when the price is no longer favourable to the pursuit of the shale potentials in the U.S. This is bad news for oil dependent economies like Nigeria and Venezuela. The latter’s president has already announced a trip to China to explore options on a way forward for a country that holds a 95 percent oil dependent economy.
Lastly, and this is a speculation from analysts, if the U.S Dollar continues to appreciate, China and the emerging markets could be headed for another significant financial crash.
By Emmanuel Iruobe
