How Does the U.S. Dollar Influence the World? -Part 2

2. Periodic fluctuation of the USD exchange rate

Some studies have shown that the periodic fluctuations of the USD exchange rate have had a serious impact on other countries. No matter whether the USD appreciates or depreciates, the negative influence cannot be avoided. The path of the impact is the tidal movement of USD liquidity that accompanies the fluctuation of the exchange rate.

When the U.S. dollar continues to appreciate, funds tend to flow to the United States, and some countries are faced with a large-scale outflow of funds, which may lead to currency crises in these countries, substantial currency depreciation. One of the direct consequences is that the currency mismatch becomes more serious. The scale of foreign debt denominated in USD rises sharply after being converted into currency, which in turn will lead to debt crises.

When the U.S. dollar continues to depreciate, funds will flock to other countries, especially emerging market economies, for the sake of high returns. On the one hand, large-scale capital inflows will promote the appreciation of the currency; on the other hand, it may cause major fluctuations in the country’s financial markets and even asset bubbles. What’s more serious is that these inflows may be short-term, just to obtain high returns. When the situation changes, it is extremely possible to escape from emerging market countries, leading to the bursting of asset bubbles and financial crises in these countries.

After the 2008 global financial crisis, in view of the impact of abnormal capital liquidity on some countries, the IMF has changed its previous attitude towards capital flow liberalization and has also advocated that appropriate tools be adopted to control cross-border capital flows in extraordinary periods to avoid economic and financial crisis.