The dollar has strengthened significantly, reaching its highest level since 2000. Indeed It has appreciated relative to other major currencies. Notably, it has appreciated 22 percent against the yen, 13 percent against the Euro, and 6 percent against emerging market currencies since the start of this year, according to the IMF.
In a recent update by the International Monetary Fund (IMF) on policy responses to currency depreciation pressures, it was noted that, within a short time, the sharp appreciation of the dollar has had significant macroeconomic implications for nearly all economies, as a result of the dominance of the dollar in international trade and finance.
According to the IMF, the dollar share of the world’s exports stands at about 40 percent. It has also been revealed by the Fund that the estimated pass-through of a 10 percent dollar appreciation into inflation is 1 percent. This pass-through effect and its attending weakening impact on currencies relative to the dollar is making the fight to bring down inflation harder in many countries.
For an import-dependent emerging market economy like Nigeria, these pressures are severe due to the greater share of dollar-invoiced imports compared with advanced economies.
The IMF also noted that about half of all cross-border loans and international debt securities are denominated in US dollars. It said, “while emerging market governments have made progress in issuing debt in their currency, their private corporate sectors have high levels of dollar-denominated debt.”
The rise in world interest rates has tightened financial conditions considerably for many countries. A stronger dollar only compounds these pressures, especially for some emerging markets and many low-income countries that are already at a high risk of debt distress.
What the IMF is Saying
The IMF believes that the policy responses to currency depreciation pressures should focus on the drivers of the exchange-rate moves and signs of market disruptions.
It said, “the appropriate policy response to depreciation pressures requires a focus on the drivers of the exchange rate change and signs of market disruptions. Specifically, foreign exchange intervention should not substitute for warranted adjustment to macroeconomic policies.”
What this means is that governments should adopt foreign exchange interventions temporarily, when currency movements substantially raise financial stability risks and/or significantly disrupt the central bank’s ability to maintain price stability. This intervention should not replace the role of macroeconomic policies.
The Fund believes that fundamental drivers play a significant role in the rising pressures. It stated that an appropriate response is to allow the exchange rate to adjust while using monetary policy to keep inflation close to its target.
