How does the United States export inflation?

<p dir="ltr">We have all heard of exporting energy resources and human capital (basically, migration), but what about exporting something intangible like inflation?</p><p dir="ltr">How is it possible that, in addition to goods and services, the United States has caused price increases in other countries for so many years, thus undermining their economic stability?</p><p dir="ltr">First of all, it is often unintentional and ends up being a side effect of several factors: the world's heavy dependence on the dollar and the <a href="https://uk.advfn.com/newspaper/igorkuchma/71614/will-the-federal-reserve-raise-interest-rates-again" target="_blank" rel="follow">Fed's actions</a>, coupled with uncertainty.</p><p dir="ltr">You see, for more than a year, Fed members have been trying to restore price stability by raising interest rates, leaving a carry trade and increasing demand for "greenbacks".</p><p dir="ltr">As a result, the <a href="https://www.tradingview.com/symbols/TVC-DXY/" target="_blank" rel="follow">DXY rose</a> (the dollar strengthened), while the value of other currencies, such as the Chinese yuan, the Japanese yen, the euro, the Indian rupee and the British pound, fell.</p><p dir="ltr">The problem is that since the U.S. dollar is involved in almost 90% of currency transactions, half of world trade, and three-fourths of Asia-Pacific trade, this becomes a problem.</p><p dir="ltr">In particular, the cost of importing food and fuel for these countries increases, so companies must increase final prices to compensate for the losses.</p><p dir="ltr">And this is how the United States unwittingly exports inflation, causing economic instability and disrupting the welfare and stability, if I may say so, of other nations.</p><p dir="ltr">In short, on the one hand, the basically universal use of the dollar makes calculations more convenient, but on the other hand, it has <a href="https://edition.cnn.com/2022/09/28/investing/fed-interest-rates-dollar-global-consequences/index.html" target="_blank" rel="follow">adverse consequences</a>.</p><p dir="ltr">To be more precise, according to the IMF, a 10% strengthening of the dollar leads to an average inflation rate of 1%. This pressure is especially felt in developing markets.</p><p dir="ltr">We have discussed the reasons or the principle of exporting inflation, but what about possible solutions to the problem?</p><p dir="ltr">For example, would abandoning the dollar or the <a href="https://www.jpmorgan.com/insights/global-research/currencies/de-dollarization#section-header%231" target="_blank" rel="follow">current trend towards de-dollarization</a> in favor of trade in national currencies help?</p><p dir="ltr">In reality, the problem would only get worse. Suppose you signed a multi-million dollar contract to import industrial equipment using Pakistani rupees a couple of months ago.</p><p dir="ltr">It is time to pay, but the country's currency has appreciated by more than 9% in the last month. You would have suffered financial losses if you had not foreseen this scenario.</p><p dir="ltr">Obviously, you will have to raise prices for end consumers to cover the costs. Now, let's consider that this is not only a problem for one company but for 80% of importers.</p><p dir="ltr">The conclusion is that although the dollar has some negative consequences, they are much smaller than the use of national currencies. </p><p dir="ltr">In addition, there are no problems when withdrawing dollars.</p><p dir="ltr">More specifically, in India, strict monetary legislation prohibits taking Indian rupees out of the country. So what to do with them if they are kept in a local bank?</p><p dir="ltr">Monetary intervention is one of the few options available to countries to counteract the adverse effects of a strengthening dollar.</p><p dir="ltr">The local central bank must intervene to support the domestic currency. The risk is to be accused of currency manipulation, and the imposition of sanctions could follow.</p><p dir="ltr">In short, "it is better to make peace with a known evil than to seek refuge in the unknown".</p>

This article was written by FL Contributors at www.forexlive.com.