The cost of living in Cairo has soared so much that security guard Mustafa Gamal had to send his wife and year-old daughter to live with his parents in a village 70 miles south of the Egyptian capital to save money.
Gamal, 28, stayed behind, working two jobs, sharing an apartment with other young people and eliminating meat from his diet. “The prices of everything have been doubled,” he said. “There was no alternative.″
Around the world, people are sharing Gamal’s pain and frustration. An auto parts dealer in Nairobi, a seller of baby clothes in Istanbul and a wine importer in Manchester, England, have the same complaint: A surging US dollar makes their local currencies weaker, contributing to skyrocketing prices for everyday goods and services. This is compounding financial distress at a time when families are already facing food and energy crunches tied to Russia’s invasion of Ukraine.
“A strong dollar makes a bad situation worse in the rest of the world,” says Eswar Prasad, a professor of trade policy at Cornell University. Many economists worry that the sharp rise of the dollar is increasing the likelihood of a global recession sometime next year.
The dollar is up 18% this year and last month hit a 20-year high, according to the benchmark ICE US Dollar Index, which measures the dollar against a basket of key currencies.
The reasons for the dollar’s rise are no mystery. To combat soaring US inflation, the Federal Reserve has raised its benchmark short-term interest rate five times this year and is signalling more hikes are likely. That has led to higher rates on a wide range of US government and corporate bonds, luring investors and driving up the US currency.
Most other currencies are much weaker by comparison, especially in poor countries. The Indian rupee has dropped nearly 10% this year against the dollar, the Egyptian pound 20%, and the Turkish lira an astounding 28%.
Celal Kaleli, 60, sells infant clothing and diaper bags in Istanbul. Because he needs more lira to buy imported zippers and liners priced in dollars, he has to raise prices for the Turkish customers who struggle to pay him in the much-diminished local currency.
“We’re waiting for the new year,” he said. “We’ll look into our finances, and we’ll downsize accordingly. There’s nothing else we can do."
Rich countries aren’t immune. In Europe, which was already teetering toward recession amid soaring energy prices, one euro is worth less than $1 for the first time in 20 years, and the British pound has plunged 18% from a year ago. The pound recently flirted with dollar parity after Britain’s new prime minister, Liz Truss, announced huge tax cuts that roiled financial markets and led to the ouster of her Treasury secretary.
Ordinarily, countries could get some benefit from falling currencies because it makes their products cheaper and more competitive overseas. But at the moment, any gain from higher exports is muted because economic growth is sputtering almost everywhere.
A rising dollar is causing pain overseas in a number of ways:
— It makes other countries’ imports more expensive, adding to existing inflationary pressures.
— It squeezes companies, consumers and governments that borrowed in dollars. That’s because the more local currency is needed to convert into dollars when making loan payments.
— It forces central banks in other countries to raise interest rates to try and prop up their currencies and keep money from fleeing their borders. But those higher rates also weaken economic growth and drive up unemployment.
Put simply: “The dollar’s appreciation is bad news for the global economy,” says Capital Economics’ Ariane Curtis. “It is another reason why we expect the global economy to fall into recession next year.’’
In a gritty neighbourhood of Nairobi known for fixing cars and selling auto parts, businesses are struggling and customers are unhappy. With the Kenyan shilling down 6% this year, the cost of fuel and imported spare parts is soaring so much that some people are choosing to ditch their cars and take public transportation.
“This has been the worst,” said Michael Gachie, purchasing manager with Shamas Auto Parts. “Customers are complaining a lot.”
Gyrating currencies have caused economic pain around the world many times before. During the Asian financial crisis of the late 1990s, for instance, Indonesian companies borrowed heavily in dollars during boom times — then were wiped out when the Indonesian rupiah crashed against the dollar. A few years earlier, a plunging peso delivered similar pain to Mexican businesses