Does Strong USD Mean A Looming Debt Crisis for Emerging Markets?

The average household in Ghana is paying two-thirds more than it did last year for fuel, flour and other necessities. In Egypt, wheat is expensive and the governmental budget suffers from bread subsidy provided to citizens. Sri Lanka is struggling to control a political crisis, and is running out of fuel, food and medical supplies.

The strong dollar is making the problems of emerging markets even worse. Compared with other currencies, the US dollar is the strongest it has been in two decades. It is rising because the Fed sharply hiked interest rates in order to combat inflation and because America’s economic health is better than most.

These factors attract investors from all over the world. Sometimes they simply buy dollars, but even if investors buy other assets, like government bonds, they need dollars to do so.

That strength has become much of the world’s weakness. The dollar is the de facto currency for global trade, and its steep rise is squeezing dozens of lower-income nations, chiefly those that rely heavily on imports of food and oil and borrow in dollars to fund them.