Strong US dollar boomerangs on Europe 

The Federal Reserve is expected to raise interest rates another three quarters of a point this week in its effort to bring down inflation, further increasing the strength of a rapidly rising dollar in the process. 

That’s increasingly being seen as a problem in Europe, where concerns about a recession are growing as currencies lose power to the U.S. dollar.  

Europe is also dealing with economic pressures from Russia’s war on Ukraine, with mounting fear that Russian President Vladimir Putin could use energy as a potent weapon this winter. Many European countries depend on supplies from Russia to heat homes over the winter. 

The worries are leading to new complaints from those who see the Fed’s actions as potentially causing more problems than they will fix if Europe takes a serious hit.

“This is my real frustration with what the Fed is doing now. Frankly, the global geopolitical economic conditions don’t justify 75 basis points,” Claudia Sahm, a former Federal Reserve economist and founder of Sahm Consulting, said in an interview with The Hill.  

“Our monetary policy is crushing Europe and emerging markets. The Fed is almost certainly making the hardship in Europe worse,” she added. 

Rising interest rates make it more expensive to borrow money and effectively make the U.S. dollar more valuable compared to other currencies.  

The euro is down about 12 percent on the year compared to the dollar, reaching a one-to-one ratio, the weakest level in about 20 years. The British pound is down more than 15 percent on the year to its lowest level since the mid-1980s. 

The Japanese yen is down 20 percent compared to the dollar, the Chinese renminbi is down about 9 percent, the Indian rupee about 7 percent and the Swiss franc about 5 percent. 

The changing values of the currencies have a number of real-world effects.

The dollar goes farther for U.S. travelers abroad, but it makes it more expensive for U.S. manufacturers to export goods. It reduces costs for U.S. importers at a time when supply-chain problems related to the coronavirus and high demand emerging from the pandemic have helped fuel inflation.

The international knock-on effects of a strong dollar are not likely to be at the top of Fed’s current list of priorities. Getting a handle on 40-year-high inflation, which was initially mischaracterized by Fed economists and Treasury officials as “transitory” and not a serious cause for concern, is more pressing.

The Fed may even view an artificially strong dollar as a good thing in the short term because it’s favorable to U.S. consumers despite forcing global economies to recalibrate their import and export dynamics.

But a major recession in Europe, where central banks are also raising interest rates to fight inflation, is not in the interest of the U.S., which is one of Europe’s biggest trading partners.  

Domestic producers have also been hit hard by the strong dollar and are keen to see exchange rates level off in the interest of selling more goods overseas. More interest rate hikes by the Fed will continue to undercut bottom lines in the U.S….