Opinion – Helio Beltrão: The almighty dollar

The dollar is getting stronger. I am not referring only to our maned wolf real, but to traditional world currencies, such as the euro, the pound, the yen and the Chinese yuan, which have more emblematic figures stamping their banknotes. The euro, for example, is worth less than the dollar, which has not happened since its official launch in 2002. The pound is approaching par, the lowest level in all history.

The recurring bet on the final crash of the dollar among recalcitrant critics of the United States, crypto-topians and social media experts continues to generate widows: it is the trade that kills all who try their luck. Despite massive injections of monetary heroin into the financial system, the dollar is always the safe haven when crises occur.

The mighty dollar became a runaway currency-crushing battering ram in 2022. Everything falls against the dollar. The exception is the real, which appreciated against the dollar this year (although in three years it was the currency that depreciated the most).

Many emerging countries felt the impact of the strong dollar, but the main victims are the developed ones. The dollar is up more than 25% against the yen and pound and 20% against the euro. Europeans — who are suffering from a serious energy crisis — will pay more for imported goods, which further fuels already explosive inflation.

A recession is already taken for granted in the developed world. As Marcelo said in “Hamlet”: “There is something rotten in the realm of markets”. The World Bank has warned that the global economy could suffer a series of financial crises that will cause lasting damage.

What caused the current dollar breaker? Dollar interest rates — the most important price in the world — attract savers to invest in the US currency. Last week, the Fed raised its benchmark rate once again, this time to a range between 3% and 3.25%. Additional increases are expected with a consequent tightening of financial conditions across the globe.

Earlier this year, the discredited Fed changed its stance and began to fight a life-and-death battle to contain the mutation of the inflationary virus. Few realized the radical game-changer, as I mentioned in January. Even today, many doubt the Fed will keep an eye on the inflationary ball despite a possible recession.

The lessons of history demonstrate: when consumers, companies and investors come to think that high inflation is rationalized or accepted by the authorities, only draconian interest rate hikes will contain the epidemic.

The remarkable economic growth of the last 40 years was largely due to the work of Paul Volcker, Reagan and Thatcher, who faced rampant inflation without fear of recession in the early 1980s. They practiced faith in interest like the bishops of the Spanish Inquisition. But the central banks of the last 15 years have relativized the creed. The inflation of 2021 and 2022 became the fault of the virus, the war, the supply chains, the greedy businessmen; nothing to do with trillion dollar injections of cash and credit or negative interest rates. The Fed has finally woken up. But what about the others?

The real is doing well, as the BC did its homework, with the largest adjustment in the world. Europe, Japan and the United Kingdom suffer because their central banks refuse to raise interest rates at the necessary pace.

Meanwhile, the US stock market suffers from rising interest rates, but investors are still looking for good reasons to stay long. The market people are young and have never seen a real rise in dollar interest rates. They don’t even know interest rates above inflation. You may be in for a not-so-pleasant surprise.