When the dollar rises strongly, currencies in most emerging economies tend to be hit hard, while currencies in advanced economies generally do not fluctuate sharply, a pattern that seems to have become the default norm in money markets for years. However, the currencies of most advanced economies are being hit hard by the "strong dollar storm", in which the dollar index climbed to its highest level in decades.

The Zitong Financial APP has learned that the stronger dollar has sharply weakened other currencies, driven by the Fed's most aggressive monetary tightening in a generation, pushing up the cost of dollar-denominated imports, curbing fiscal expansion and fuelling inflation in other economies.

This time, developed economies can not escape the "wave of currency devaluation".

At a time when the energy crisis and rising consumer prices are dragging down the European economy and rising borrowing costs have cooled the property markets in Australia, Canada and New Zealand sharply, the stronger dollar has increased pressure on central banks in these advanced economies to follow the Fed in aggressively raising interest rates, which will be a further drag on weakening economic growth in these countries. However, the ability of the currencies of these countries to influence the dollar is very limited, which means that there is little possibility of easing the relative strength of the dollar in the short term.

While the negative impact of the Fed's more-than-expected tightening of monetary policy on global currencies does not surprise markets, it is the first time in years that the dollar has strengthened sharply against global developed market currencies as a whole, not just relative emerging economies.

In this wave of dollar strength, it is the currencies of developed countries that have been hit hard.

Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics, said: "the strength of the dollar is usually accompanied by upward short-term and long-term interest rates in the United States, or global market pressures and safe-haven flows to the dollar, which is considered a safe haven. The financial conditions of generally tightening policies around the world have led to a slowdown in the growth of advanced economies. "

It is understood that the US trade-weighted dollar index with developed economies has soared 10 per cent this year, reaching its highest level since 2002, while the relative emerging market index has risen only 3.7 per cent, lower than the peak level since the COVID-19 epidemic in 2020. Today, the dollar index (DXY), which measures the dollar against six major currencies-the euro, the Swiss franc, the yen, the Canadian dollar, the pound and the Swedish krona-climbed to 110.698, once again hitting a two-decade high.

The dollar surged further against developed market currencies after the Fed raised interest rates

While some of the world's worst-performing currencies this year have come from developing economies such as Sri Lanka, commodity-backed currencies such as the Brazilian real and the Russian rouble have performed relatively well, supporting emerging market currencies as a whole.

Sayuri Shirai, a professor at Keio University and a former governor of the Bank of Japan, said: "just by raising policy interest rates, central banks in other economies are unlikely to stop their currencies from depreciating. "

She also said this was because the stronger dollar reflected not only expectations of aggressive interest rate hikes by the Fed this year-thereby increasing demand for US fixed income assets-but also the risk of a global recession caused by higher-than-expected policy rate increases around the world, leading to a surge in demand for safe havens.

In the coming days, as the ECB considers raising interest rates by a record 75 basis points, while grappling with record inflation and the euro falling below 1:1 parity against the dollar, markets are starting to wonder whether the dollar's strength can be temporarily suppressed. In addition, the Bank of Canada is expected to raise interest rates by 50 basis points, while the Reserve Bank of Australia recently raised interest rates by another 50 basis points.

Global central banks follow the pace of interest rate increases by the Federal Reserve, and emerging markets such as Brazil and Mexico are already at the forefront of the global tightening wave.

In the UK, the UK is already in recession and the Bank of England is likely to tighten monetary policy further on September 15th, according to a business lobby group. Depressed investor sentiment has pushed the pound to its lowest level since 1985 as the Bank of England faces a loss of investor confidence.

The yen, once seen as a safe haven, has fallen to its lowest level in 25 years, making it harder for the BoJ to stick to its unique monetary position of holding on to massive monetary stimulus even as the global central bank starts the process of raising interest rates and prices rise.

The Federal Reserve keeps raising interest rates, and the decline of global currencies is hard to stop.

Some analysts believe that the dollar is likely to continue to strengthen because the Fed has not yet finished the process of raising interest rates, saying that only when the Fed controls US price increases will it be possible for global central banks to breathe a sigh of relief on the currency exchange rate issue.

Since it became clear that the Fed turned to tightening mode about a year ago, developed market currency woes are as severe as emerging market currencies. Of the 31 major currencies tracked by Bloomberg, four developed countries were among the top 10 declines, of which the Canadian dollar was the only developed market currency that performed best.

For central banks such as the European Central Bank, whose currencies trade the most with the dollar, the current energy crisis has made it clear to policymakers that because the dollar is being used to price global commodities, the euro is becoming a conduit for global inflation.

"I think exchange rates are more important in special cases where energy supplies are hit," Isabel Schnabel, a member of the ECB's executive board, said earlier.

The yen, which ranks second in terms of trading volume with the dollar, has also been hit hard. After breaking the important 144 mark, the yen exchange rate is not far from 146, which prompted Japan and the United States to take joint action to boost the exchange rate in 1998. It also increases the likelihood that Japanese inflation will exceed 3 per cent, well above the 2 per cent target set by the BoJ.

While the BoJ governor, Mr Kuroda, insists the recent supply-driven rise in consumer prices will not be sustainable, Japanese households and companies are becoming increasingly uneasy as the depreciation of the yen exacerbates soaring energy and import costs.

Japanese government officials have warned that the yen is off track. "sudden and violent fluctuations in the foreign exchange market are not desirable," Japanese Finance Minister Suzuki Shunichi said after the G7 finance ministers' online meeting. "the recent movements in the foreign exchange market have been unexpected," he stressed, stressing that he was watching the weakness of the yen to a great extent.

For many countries, the bigger concern may be that higher interest rates may not help cool the sharp depreciation of their currencies because their economies look more fragile than the US.

Sterling is on the verge of falling below its March 2020 low, although swap traders expect the Bank of England to raise interest rates at a faster pace than the Fed, betting that the UK benchmark interest rate will exceed 4.25 per cent within six months, which could exceed 4 per cent in the US.

While many emerging economies have been hit by rising interest rates and inflation, at least so far, they have generally weathered the sharp shocks of the Fed's rate-raising cycle better than in the past. this is thanks to an increase in foreign exchange reserves and a series of measures that preceded the Fed's rapid rate hikes.

Foreign exchange reserves of emerging economies remain at more than 40% of the total.

Some countries, such as Chile and India, have intervened to support their currencies, which is more politically difficult for developed markets.

Many foreign exchange traders believe that one of the ways to ease the pressure on the exchange rate is a slowdown in the US economy, which weakens the pace of monetary tightening of the Federal Reserve, which in turn leads to a decline in the dollar.

The rate increase chosen by Fed officials at the September 20-21 policy meeting is likely to be strongly affected by the latest monthly consumer price index (CPI) released on Sept. 13. For now, the Fed has hinted that it may take a long time to loosen policy and that tightening needs to be maintained for some time to curb inflation.

"if the dollar continues to rise, the problem will become more acute for policy makers in advanced economies," said Mansoor Mohi-uddin, chief economist at Bank of Singapore. So even if domestic capital markets continue to plummet and economic growth falters, central banks will choose to continue to raise interest rates this year. "