High Inflation and a Strong U.S. Dollar
High inflation and a strong U.S. dollar – for now, the only way is up
As 2022 is well over halfway through, markets may be feeling like the COVID-19 theme has subsided after the two-year peaks and troughs of the pandemic, but as always new challenges arise and lead the way for more potential volatility. Inflation is the ‘flavor of the year’ as economies swing into the aftermath of the pandemic with central banks tightening monetary policy to manage dips in their own currencies to curb the rise in inflation. This theme is particularly challenging for emerging market economies, as is the increasingly stronger U.S. dollar. All previous emerging market fallouts were linked to dollar strength, and as the need to steer off dips in currencies occurs, central banks have turned to tightening their monetary policy. This has led the World Bank to forecast just a 4.6% expansion for emerging economies this year, compared with an earlier 6.3% prediction, and the International Monetary Fund expects inflation to average 8.7% in emerging markets this year - around 2.8% higher than projected at the start of the year in January.