Aurelia Butler

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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The US dollar is not a tide that lifts all boats. We saw that clearly earlier in April as an elevated US dollar, driven to a six-month high against a basket of other currencies by a repricing of US interest rates, exposed pockets of currency stress in Asia. The Japanese yen and Korean won dropped to historic lows, and other currencies, ranging from the euro to the renminbi, have tumbled since.This is not the highest the dollar has reached — it peaked higher in September 2022, when a surprise rate jump and Russia’s war in Ukraine spurred dollar demand. But unlike 2022, when investors flocked to the dollar amid a global tightening cycle, a stubbornly hot American economy now contrasts with a disinflationary global backdrop. With markets now betting that US interest rates will remain high while rates fall elsewhere, investors will choose the dollar to latch on to better returns and supercharged American growth. This threatens to create more upward pressure on the value of the dollar, with risks for the global economy.First, a strong dollar alters trade flows, with the potential to renew global inflation. It raises America’s purchasing power, allowing US consumers and companies to snatch up goods from other economies. This may export inflation to countries that have already begun to quell rising prices, as local consumers and companies must pay more for dollar-priced goods. Commodity prices have also moved in line with the dollar since 2020, according to the Bank for International Settlements.Trade shifts may be especially destabilising for the US. A strong dollar makes imports more appealing, while exports are priced out of foreign markets. This may undermine President Joe Biden’s manufacturing stimulus and his battle with the persistent US trade deficit. It could also undercut efforts to de-risk supply chains from China, potentially leading to more tariffs and tension. A stronger dollar paired with a deflating Chinese economy could allow Chinese goods to flood the market, especially in critical sectors where China already has an edge on prices. A bullish dollar could add to existing stresses in the financial system, too, particularly by raising debt repayments facing emerging economies. IMF managing director Kristalina Georgieva has warned that high US rates could cause a slew of defaults — with the potential for regional or global spillover.Potential solutions are few and far between. Many countries sit on large reserves and could sell off dollars. But if interest rates in the US continue to stray from the pack, any intervention would be momentary and come at the cost of liquidity. While the US could theoretically undertake a co-ordinated dollar-selling effort, most analysts view this as unlikely. Some countries may choose to raise interest rates, as Indonesia did last week, to stave off the dollar, but that threatens to damp economic growth.The longer-term trajectory of the dollar may ultimately come down to the November presidential elections. Biden has not commented on the strong US currency, though Janet Yellen did voice concerns in a meeting with her Japanese and Korean counterparts. Donald Trump, meanwhile, has called the dollar’s gains a “disaster”. Some of his likely picks for economic posts, including former trade representative Robert Lighthizer, have floated drastic measures to deal with the strong dollar and mounting US debt, reportedly including dollar devaluation. While such actions might achieve their immediate aims, they may also depress global confidence — and create a host of new problems. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Concern over China’s economic clout has created “a hell of a chance” for the US to pass legislation paving the way for more free trade deals with Latin American countries, said President Joe Biden’s special adviser for the region.Former senator Chris Dodd said he was increasingly optimistic about the Americas Act getting through Congress this year — which would harmonise and expand existing US trade deals with Latin American nations and offer incentives to “nearshore” production from China.“We’d love to see the Americas Act passed,” Dodd told the Financial Times on the sidelines of the Concordia Americas summit in Miami this week.Asked about the bill’s chances in an election year, he said: “If you’d asked me that question any other time, I would say ‘not much’, but in this environment it has got a hell of a chance. You’ve got a bipartisan, bicameral proposal from people who are highly regarded and respected.”China has vastly expanded trade and investment in Latin America this century, displacing the US as the region’s biggest trading partner. That has triggered worries in Washington that it is losing clout in an area traditionally under its sway.But the US has lacked the tools to fight back after years of congressional opposition to expanding free trade.However, legislators in both houses introduced the bill in March with bipartisan support. The Global Americans think-tank described the Americas Act as “the most comprehensive US policy attempt to deepen relations with the Western Hemisphere in more than two decades”.The bill represents an attempt to turn back towards the ambitious vision touted in the 1990s by presidents George HW Bush and Bill Clinton of a free trade area stretching from Alaska to Tierra del Fuego.That dream died as opposition from leftwing Latin American governments in the first years of this century torpedoed the talks, prompting Washington to shift towards individual country deals.Today the US has a patchwork of trade pacts with 12 nations in the Americas. The US-Mexico–Canada Agreement (USMCA) is by far the most important, while Central America and the Dominican Republic have their own pact.Brazil and Argentina, the region’s largest and third-largest economies, respectively, have no free trade agreements with the US. Dodd said worries about China’s growing economic power in Latin America “certainly contributed” towards the change of congressional mood in Washington over trade and investment. The Americas Act would require participating countries to sign up to standards on democracy and the rule of law as well as trade. It establishes a potential process for countries to join USMCA, with Uruguay and Costa Rica seen as ideal initial candidates.Dodd said if US trade and investment incentives were attractive, the package could be offered to any country willing to accept the conditions.“If you can get economic growth occurring even in Venezuela, then you will avoid the next 25 years of another Cuba and 8mn Venezuelan [migrants] in Colombia, Brazil, Ecuador and the United States,” he said. The US eased tight economic sanctions on Venezuela in October in an attempt to encourage moves towards free and fair elections. That gesture was partially reversed this month as Washington said Caracas had “fallen short” on its promises.Dodd quoted Biden as telling Colombia’s leftwing President Gustavo Petro at the White House last year that “I hate sanctions as the president of the United States. I think they’re dreadful. I don’t think they work.“I think they’re painful to people and I’m willing to get rid of them in Venezuela but it’s going to be tit for tat . . . [if] Venezuela does certain things, I will start to pull [sanctions] out.” Petro was “blown away”, Dodd recalled.      More