Research
What a strong dollar does to everyone else
The US dollar is the world's invoicing, borrowing and reserve currency. When it strengthens, the effects ripple far beyond America's borders.
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Most of the world’s trade is invoiced in dollars, a large share of cross-border debt is denominated in dollars, and most central bank reserves are held in dollars. So the dollar’s value is never only an American story.
Three channels of spillover
1. Debt. Governments and companies that borrowed in dollars but earn in local currency see their debt burden rise when the dollar strengthens.
2. Imported inflation. Commodities like oil are priced in dollars. A weaker local currency means paying more for the same barrel, which pushes inflation up at home.
3. Policy pressure. To defend their currencies, other central banks may raise rates even when their own economies don’t need it.
The “dollar smile”
Economists sometimes describe the dollar’s behaviour as a smile. It tends to strengthen at both extremes: when the US economy is booming relative to everyone else, and when the world is in crisis and investors run for safety. It tends to weaken in the middle, when global growth is broad-based.
Suggested sources: BIS statistics on dollar-denominated credit; IMF COFER reserve data.