Pressure on Emerging Economies from the Overvalued Dollar

The rise of the US currency depletes their limited foreign exchange reserves and stunts growth by making their exports more expensive.

The strengthening of the dollar over the past year due to continued interest rate hikes by the US Federal Reserve has put severe pressure on many emerging economies, which have seen their national currencies continually weaken and their debts become more expensive to service.

Egypt, Pakistan and Lebanon have stopped pegging their currencies to the dollar since last month and they are falling significantly. Nigeria and Argentina are under pressure from the markets to do the same, it added. The Turkish lira has also recorded a significant decline. There is also pressure in Malaysia, Thailand and India, whose currencies are at their lowest levels in the last month. Ukraine is still a special case because of the war.

This year’s devaluation of currencies by Egypt, Pakistan and Lebanon has been done in an attempt to unlock emergency financing from the IMF. The 23% devaluation of Egypt’s currency since early January 2023 was the third since March last year, when the government began to lift a five-year peg of the currency to the dollar. The Egyptian pound has since lost about 50% of its dollar value.

The Pakistani rupee also lost about 20% of its dollar value after authorities eased controls on January 26. Lebanon’s central bank let its currency plummet 90 percent against the dollar on Feb. 1, ending a peg with the dollar that had been in place since 1997, the same data show.

For many countries with artificially strong exchange rates, the decision to devalue is a difficult choice. Defending exchange rates depletes their usually limited foreign exchange reserves and also inhibits growth by making their exports more expensive.

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