Why the Strong Dollar Creates Headaches Globally

John Connally, who ran the US Treasury under President Richard Nixon five decades ago, once opined to his international counterparts that “the dollar is our currency, but it’s your problem.” This year it’s been a bigger headache than usual. The mighty greenback surged against just about every other currency, driven by a combination of higher US interest rates, diverging economic prospects and a hunt by investors for safety. For some countries, that has meant the potential for faster inflation — exacerbating a problem already plaguing much of the world — and a greater risk of tipping into recession. Others have felt the pain through higher costs for vital imports or an increased repayment burden for dollar-denominated debt.

Stronger than at any time since the 1980s, according to an index from the US Federal Reserve that uses a basket of currencies and adjusts for differences in inflation. By that measure, the US currency climbed more than 10% in the first 10 months of 2022, eclipsing even the highs seen during the Covid-related financial panic of 2020. Against the yen, the dollar hit a mark last seen in 1990 — around the beginning of Japan’s so-called lost decade — and against the euro it strengthened to better than 1-to-1 for the first time since 2002, when the common currency was still in its infancy. Relative to China’s currency, the greenback was at its most formidable level since the 2008 financial crisis.