The longer and better the greenback soars above the remaining, the higher the chance of extra extended world stagflation, debt issues within the creating world, extra restrictions on the free move of products throughout borders, higher political turmoil in fragile economies and higher geopolitical conflicts. All of this might have an effect on the US economic system ultimately by some mixture of decrease demand for its exports, extra unsure provide chains, monetary losses and higher nationwide safety issues.
The US can’t do a lot to instantly counter the drivers of foreign money weak point elsewhere. However it could actually — and actually ought to — do two issues in response.
First, it ought to intensify the home coverage effort to make sure that the (extremely possible) outperformance of the US economic system is accompanied by safeguards in opposition to disappointing absolute efficiency. This, most significantly, includes the Federal Reserve battling inflation extra successfully, enacting further pro-growth and pro-productivity structural measures, providing higher safety for essentially the most susceptible segments of society, and enhancing supervision of non-banks.
Second, the US ought to cleared the path in coordinating with allies on insurance policies to include the dimensions and scope of injury to the worldwide economic system. There’s a fallacy within the present inclination of so many international locations to “self-insure” in opposition to widespread world shocks within the absence of correct multilateral cooperation. The extra this continues, the higher the general stress on everybody.
A powerful greenback helps the US to scale back imported inflation, however it’s removed from a panacea. Too huge a foreign money shock dangers undermining and, in some particular facets, destabilising a world economic system that’s but to completely come to grips with the implications of declining progress and excessive inflation.
The Market Recap publication is a wrap of the day’s buying and selling. Get it every weekday afternoon.