The US dollar is a weapon

The weakening of currencies against the US dollar has made the struggle to bring down skyrocketing inflation around the world a difficult task, according to the International Monetary Fund.

An IMF report published Friday elaborated on how countries should respond to the US dollar's increase in strength. In the midst of a global financial crisis that was exacerbated by the war in Ukraine, the US dollar hit its highest level since 2000.

The currency has appreciated 22% against the Japanese yen, 13% against the euro, and 6% against emerging currencies since the beginning of 2002.

“Such a sharp strengthening of the dollar in a matter of months has sizable macroeconomic implications for almost all countries, given the dominance of the dollar in international trade and finance,” the IMF wrote.

While the US share in merchandise exports has declined from 12% to 8% since 2000, the dollar's share in world exports is still 40%.

“On average, the estimated pass-through of a 10 percent dollar appreciation into inflation is 1 percent. Such pressures are especially acute in emerging markets, reflecting their higher import dependency and greater share of dollar-invoiced imports compared with advanced economies," the report said.

Around 50% of all cross-border loans and international debt securities are in US dollars.

“As world interest rates rise, financial conditions have tightened considerably for many countries. A stronger dollar only compounds these pressures, especially for some emerging market and many low-income countries that are already at a high risk of debt distress,” the IMF said.

The appropriate policy response is to allow the exchange rate to adjust while using monetary policy to keep inflation close to a certain target, according to the report.

“The higher price of imported goods will help bring about the necessary adjustment to the fundamental shocks as it reduces imports, which in turn helps with reducing the buildup of external debt. Fiscal policy should be used to support the most vulnerable without jeopardizing inflation goals,” it said.