A strong dollar might provide some cushion to oil exporters, particularly GCC producers whose currencies are pegged to the greenback, but experts fear it may hurt the world financial system in the long term.
They also caution that a strong dollar may lead to an economic slowdown in the GCC region, if the low oil price persists in the medium term and the US Fed Reserve starts to raise interest rates.
The Brent oil price has tumbled nearly $70 since June 2014 to nearly six-year lows below $50 a barrel, clouding the outlook for the GCC states, where government income from hydrocarbon sales powers economic growth.
GCC economies have performed well during much of the global financial crisis as the US economy slumped. Now, the US economy is expanding strongly, even as the GCC economies face slow growth because of the persistent decline in oil prices.
There are fears that rising dollar could lead to a wave of bankruptcies in Russia, Brazil and some other emerging economies, and seriously impacting Germany and other European countries that rely on exports.
A recent report showed that countries, corporate entities and private households have, globally, become indebted to the tune of $10tn. A growing share of the debt has been incurred within emerging markets.
This debt could also become an existential risk. Most of these liabilities are not in native currencies like the Brazilian real or Russian ruble, but in dollars.
The Basel-based Bank for International Settlements (BIS), a kind of central bank to the central banks, warned in its December 2014 Quarterly Review, that the appreciation of the dollar against the backdrop of divergent monetary policies could “have a profound impact on the global economy”.
Hans Redeker, chief currency strategist at Morgan Stanley, notes that money borrowed by emerging economies is often used for domestic investments, so the balance sheets of many companies could be negatively impacted.
Redeker fears that the crisis symptoms could play off each other, posing the danger of a chain reaction: “The BIS warnings confirm what we’ve been saying for a long time: Hell could soon break loose in the emerging markets”.
Already now, the appreciation of the dollar is one of the strongest in the past decades. The Dollar Index, which measures the greenback against the world’s major currencies, has been at its highest since 2006.
In this context, a research paper prepared by a Qatari economist is worth studying. Qatar Central Bank’s director, Research and Monetary Policy Khalid al-Khater said, “If the low oil price persists in the medium term and the Fed starts to raise interest rates that might contribute to economic slowdown in the GCC. But it depends on the pace of the tightening process, how fast and how persistent they will be.”
Clearly, the dominant dollar has the potential to rattle global economy if it continues to gain strength.
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