Last year, there were plenty of doom-and-gloom warnings about how the Fed's turbocharged interest rate hiking campaign would tip the world into a recession. But that scenario has not played out.
Why it matters: The globe has, so far, been able to weather higher interest rates without the devastating consequences that some had anticipated.
How it works: The aggressive tightening cycle pushed the U.S. Dollar Index to the highest level in decades (though it's now well below its peak). At the time, that meant a weaker currency practically everywhere else.
- Economists feared the dynamic would be potentially catastrophic overseas: It effectively induces inflation abroad, since dollar-denominated imports become more expensive in local-currency terms.
- It could also cause distress for emerging market economies and companies that borrow money in dollars. As the dollar appreciates, that debt gets harder to service.
Yes, but: There are a few reasons why the global economy has generally dodged the downbeat predictions related to a strong dollar.
What's happening: The greenback soared not just because the Fed was hiking, but because it was hiking faster than other central banks. That gap is now closing.
In the case of emerging markets, central banks raised interest rates aggressively.
- "That kept capital from fleeing back to the United States when the Fed raised interest rates," Steve Kamin, a senior fellow at the American Enterprise Institute, tells Axios. (Kamin, a former Fed official, argued last year that the strong dollar wouldn't crush the global economy.)
- Nations like Indonesia, Brazil and Chile have benefited from higher commodity prices: "When they produce commodities, they are getting a lot more money for the commodities they export. That brings in more dollars, which, to some extent, helps alleviate economic stresses of the higher prices for consumers."
- Kamin points out that some emerging nations are struggling: So-called frontier nations, for instance, are under pressure.
Worth noting: At a recent event hosted by the New York Fed, former Treasury official Brad Setser pointed out that many emerging market central banks hold more dollar reserves: "They, in a financial sense, benefit from higher rates, although the economy doesn't always feel like that."
- Setser noted that his fears about the "super dollar cycle" last year have not yet panned out.
The bottom line: There are still risks on the horizon for nations around the world. But the strong dollar is no longer top of their list of things to worry about.
