The U.S. dollar has gained about 12 percent in value this year relative to other major currencies, in large part because the U.S. Federal Reserve has raised interest rates more aggressively than have the central banks of many other major economies.

Also, fears of a global recession and geopolitical turmoil have spurred investors to seek safety in the world’s reserve currency, boosting dollar-denominated instruments and making other currencies less attractive.

Poland’s zloty and the Hungarian forint have fallen to new lows against the dollar recently.

Even the euro was briefly worth less than a dollar last month, although it has now barely edged back above the buck, closing at $1.03 on 1 August. The euro has lost 10 percent of its value against the dollar this year.

According to the terms of international trade, imports of a range of goods—including food and fuel—must be paid for in dollars.

About 40 percent of invoices presented to countries for their imports require payment in dollars, according to a recent study by the International Monetary Fund (IMF).

Surprisingly, prices for transactions between businesses in two distant countries can be affected more by the dollar’s strength than by the value of the two native currencies, the IMF study found.

“Trouble is coming in emerging markets,” Megan Greene, senior fellow at Harvard University’s Kennedy School of Government, told The Wall Street Journal.

Sri Lanka’s recent collapse “is a familiar story in emerging markets and a sneak peek at what’s to come,” she said.

Currently, about 60 percent of the world’s 75 poorest countries are in, or close to, debt distress—a situation in which a country is unable to meet its debt payments—the IMF has calculated, with some middle-income countries also now starting to show signs of trouble.

After more than a year of lofty commodity prices buoying poor nations’ revenues and delivering fat returns to investors in those currencies, a slowing world economy now is shrinking those revenue streams.

As a result, “cracks are appearing” in emerging countries’ currencies, Goldman Sachs analysts said in comments quoted by the WSJ.

Hedge funds are betting that eastern European currencies are among the most vulnerable now, the WSJ said.

“If flows of [Russian] gas are cut off [to Europe] this summer,” the forint and zloty “will bear the brunt of it,” Stephen Gallo, foreign exchange strategist at BMO Capital Markets, predicted to the WSJ

The two currencies lost as much as 6 percent against the dollar in July. The Czech koruna is off 2 percent.

Weak currencies worsen inflation by making imports more expensive.

The solution: to compete with the dollar, many countries’ central banks may have to raise interest rates higher faster than they planned.

If more investors can be drawn to their currencies, they will have more resources with which to buy dollars to pay their bills.

Central banks in Hungary and Poland recently raised their interest rates in July, Hungary’s by two full points, but to little effect so far. 

Late in July, Europe’s central bank boosted its key rate from -0.50, where it had lain for eight years, to zero. 

However, with the U.S. base rate as high as 2.5 percent, investors were not moved, especially after the Bank of France set its rate at 2.5 percent on 27 July.

TREND FORECAST: Central banks waited far too long to begin to raise rates, as even U.S. Federal Reserve chair Jerome Powell admitted in March testimony to Congress when he said, “We’re not getting our own job done.”

Now the banks are unable to raise rates high enough fast enough to matter to inflation.

Ideally, interest rates should be high enough that, with compounding, they rise above the rate of inflation.

In the U.S., that would place interest rates above 9 percent, not at a maximum of 2.5 percent, where they are now.

The dollar is strong not because the U.S. economy is robust but because other currencies are dramatically weaker by comparison.

TREND FORECAST: Absent a wild card event, the dollar will remain at the pinnacle of world currencies through the rest of this year.

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