The Dollar Got So Strong It Became Everyone Else's Problem
Through 2022 the dollar reached its highest level in about two decades against a basket of major currencies, and the consequences landed hardest on countries that had borrowed in it.
Why It Rose
Three forces pushed in the same direction. The Federal Reserve was raising rates faster than most other major central banks, which made dollar assets pay more. The United States was more energy self sufficient than Europe or Japan, so the commodity shock damaged its terms of trade less. And global risk aversion drives money toward the dollar regardless of what the United States is doing, because the dollar is the reserve currency.
Rate differentials, relative growth, and safe haven demand rarely align. In 2022 they did.
The Mechanism That Matters Abroad
An enormous quantity of debt outside the United States is denominated in dollars, borrowed by governments and companies whose revenue is in local currency. When the dollar strengthens, the local currency cost of servicing that debt rises even though the borrower has done nothing and the interest rate has not changed.
A company in an emerging market earning local currency and owing dollars faces a balance sheet squeeze driven purely by an exchange rate. This is why economists describe the dollar as a global financial conditions variable rather than a bilateral price. When it rises sharply, credit tightens everywhere it is borrowed, which is nearly everywhere.
A strong dollar tightens financial conditions in countries the Federal Reserve has no mandate to consider and no obligation to consult.
The Commodity Layer
The second channel compounds the first. Oil, wheat, and most traded commodities are priced in dollars. A country whose currency has fallen 20 percent against the dollar faces a 20 percent increase in the local price of imported energy and food before any change in the commodity's dollar price.
In 2022 both moved adversely at once. Commodity prices rose in dollar terms and the dollar rose against nearly everything, so import bills in local currency terms increased twice over. For food and energy importing developing economies, this was the transmission that produced genuine distress.
Japan and the Intervention
The clearest single illustration was the yen. Japan maintained very low rates while the Federal Reserve raised aggressively, and the yen weakened substantially. Japanese authorities intervened in currency markets in the autumn, selling dollar reserves to buy yen for the first time in decades.
Intervention against a rate differential is difficult, because the underlying cause remains. It can slow a move and punish speculative positioning, but it does not change the arithmetic driving the flow. The lasting fix required either the Fed to stop or Japan to move, and eventually both happened.
What It Did to United States Companies
Domestically the effect showed up in earnings. Large multinationals earn substantial revenue abroad, and foreign earnings translate into fewer dollars when the dollar is strong. Several large firms reported meaningful revenue drag from currency translation alone.
This is why analysts distinguish reported growth from constant currency growth, which strips out exchange rate effects to show underlying performance. Ignoring the distinction makes a strong dollar look like weak operations.
The Bottom Line
The 2022 dollar rally was a global tightening event that ran through debt service and import costs. The reserve currency's exchange rate is a policy variable for the whole world and a byproduct of policy for the country that issues it.