When the dollar smiles, other currencies frown. The dollar smile theory suggests the US currency grows up in value at either – when the American economy is extremely weak or strong.
The greenback, the currency that powers roughly 40% of the $28.5 trillion annual global trade, is at an all-time high now, up 15% against a basket of currencies since mid-2021, primarily as a result of the Fed's aggressive rate hiking, which is driving cost of food imports, deepening poverty across much of the world and fueling debt default and toppling the government in Sri Lanka.
Pain of the US economy
The US economy is not in a good state now. The world's No 1 economy is having its worst inflation in 40 years and its central bank is desperate to shield American people from immense price shocks using its potent weapon – policy rate – ruthlessly.
Doing so, US Federal Reserve chair Jerome Powell, in fact, has put the world – from Europe to Asia – on its toes from March this year.
He made four hikes so far in 2022, jacking the US overnight interest rate by a combined 2.25 percentage points from near zero, meaning that American borrowers will now pay an extra $225 in interest on a $10,000 loan.
How will it help douse the hottest inflation since the 1980s when borrowing cost goes up?
So far it has not. Rate is being hiked and inflation is going high too, with prices jumping 9.1% in June, a fresh record.
Is a US recession coming?
Repeated rate hikes would rather push the American economy into a recession, some economists fear, as the latest increase of three-quarters percentage point will be a double-barrel monetary blast for US consumers and businesses, says CBS news.
The Fed, however, believes its actions are working; they have slowed demand as home sales dropped and consumers put major purchases on hold.
This has also boosted Powell's morale. He vowed on Wednesday that the Fed would not flinch in its battle against inflation even if that means a "sustained" period of economic weakness and a slowing jobs market. He also ruled out recession fears.
"It doesn't make sense that the U.S. would be in recession," Reuters quoted him as saying Wednesday.
Before Powell, former Fed chief Paul Volcker had opted for monetary tightening to battle double-digit inflation in the 1980s.
Though inflation has not yet reached a double-digit, a 9.1% rate is close enough to raise the stakes for both the Fed and the Biden administration ahead of congressional elections in November, Reuters says, pointing out the political sensitivity of consumer prices going up.
But the US rate hike, whether it contains inflation or not, is not a problem for the US alone. It foreshadows troubles for the whole world in many ways.
What about us?
If we consider Bangladesh' worries, it may lead to a lower sales of apparels shipped from here. In another way, it makes the dollar stronger. It puts pressure on advanced economies to go for rate hikes to keep their currencies stable. But doing so is not easy for import-dependent countries who trade in dollars.
Dollar going higher makes their currencies weaker and imports expensive, pushing inflation up further, as we are experiencing currently in Bangladesh and neighbouring countries in Asia.
"Powell has no choice but to push the US into recession to regain control over prices," former US Treasury Secretary Lawrence Summers tells CNN.
Journalist and author William Pesek blames Jerome Powell's insipid leadership as US Federal Reserve chairman for making Asia pay the price for rate hikes and a strong dollar.
In an opinion piece in Nikkei Asia, Pesek describes how Powell's tightening policy hits this region's export-reliant economies hardest.
He recalls how Fed rate hikes led to a dollar rally setting the 1997 Asian financial crisis in motion and making it impossible for Indonesia, South Korea and Thailand to maintain currency pegs to the dollar. In 2013, the Fed policy triggered a "taper tantrum" that shook governments from New Delhi to Manila.
This time again, Asia is bracing for the worst from the Fed rate hikes, which are threatening the Chinese, weakening the yen in Japan, and worsening food and energy crises in the Philippines.
A strong dollar is taking away investment from Asia as well.
For economies from South Korea to Vietnam, possible outflow of capital remains a concern, while Indonesia and Thailand will bet on attracting much-needed foreign investments to build massive infrastructures. Malaysia has to hike interest rates to keep its currency, ringgit, from weakening further.
No region other than Asia may have more at stake from the US Fed policy under the globe's most powerful money man, concludes William Pesek, the Tokyo-based journalist.
Costly greenback hurting pockets
So it is no wonder that concerns are mounting in Bangladesh, with taka losing value everyday and dollars getting scarce at banks to meet the importers' demands. Though global prices of some commodities started easing, Bangladesh's consumers are not seeing any relief as weaker taka makes imported goods pricier in the local market.
A strong dollar is also eating the profits of businesses as their imported input costs are rising.
The latest policy rate hike will make the dollar more expensive and taka will surely lose further, says Dr Ahsan H Mansur, executive director at the Policy Research Institute (PRI), a local think tank.
"Capital always moves to the United States when it comes to such policy changes by the Federal Reserve," he said, citing that India lost a portfolio investment worth $37 billion already.
At the same time, new foreign direct investment (FDI) comes down. Part of the profit of FDI is also not reinvested, he noted.
The economist, however, refers to a positive impact of the policy rate hike in June, which helped reduce domestic demand in the US and Europe, leading to some declines in global commodity prices.
"Prices of some products have already come down. However, due to the huge consumption, prices of fuel, gas and fertilisers will not go down soon," he said.
Further reduction in the domestic demand in the developed countries will cut export demand from Bangladesh, he warned.
The economist suggests lifting of the 9 percent cap on interest and raising the rate to make taka stable and the dollar available.
Cost of doing business must be reduced
In order to survive in this competition, it is necessary to reduce the cost of doing business by keeping the supply of electricity and fuel for the export sector as well as reducing the cost of transportation, Dr Ahsan Mansur said.
Dr Selim Raihan, professor of economics at the Dhaka University said, hiking rate is a necessity for the US, but it is having negative impacts on countries which have trade and financial links with that country. "If demand slows in the US market, demand for our exports will fall there," he said.
However, there is a different scenario, too. "There were fears that export income would drastically fall during the 2008 global recession, which did not happen as feared," Prof Selim Raihan pointed out.
Explaining, he said Bangladesh-made denim apparels, T-shirts and under-garments are among basic required clothing in the US market and demands for these usually do not fall even during financial stress.
Still, concerns remain.
"Our exports may face price cuts, which may lead to cuts in wages and jobs," he said, citing reasons for worries of export sectors if the global situation does not improve.