India must use G20 to push for weaker dollar

Many are excited that India has become president of the G20, representing the world’s 20 biggest economies. But will this be little more than ceremonial? Cynics say the G20 is of little use other than photo-ops for its leaders. Created to organise a global economic stimulus to combat the Great Recession of 2008, it has done little of note since.
India cannot galvanise the G20 by pushing its own national agenda. Rather, it must address vital issues being ignored because of rival preoccupations like the Ukraine war. The biggest missed issue today is an over-strong dollar that has become a wrecking ball smashing the world economy. India must use the G20 to launch a collaborative effort to weaken the dollar.
Five factors in recent years have created a perfect economic storm. The first was the emergence of China as a strategic threat, resulting in sanctions, high tariffs and the fracturing of global value chains as countries cut ties with China. The second was Covid, which devastated all economies. The third was the Ukraine war. The fourth was high inflation, which preceded the war but was exacerbated by it. The fifth was soaring interest rates across the world as central banks sought to fight inflation.
These five factors have pushed the world into recession and unemployment even as inflation rages. One consequence has been a soaring dollar. By October, the dollar was up 15-20% in 12 months against most currencies. In recent weeks, it has fallen a bit, but is still far above its rate in the mid-2010s. Experts including Gita Gopinath, first deputy managing director of the International Monetary Fund, have rung alarm bells.
High inflation
The over-strong dollar has stoked high inflation in other countries, since most commodities are priced in dollars. The impact is greatest in developing countries with a high reliance on imported food and fuel. This has been terrible for India. The rupee has gone from Rs 74 to Rs 82 to the dollar this year. Even when oil returns to its pre-war price in dollars, it will be 12% more expensive in rupee terms.
Besides, the over-strong dollar has stoked an irrationally large flow of dollars out of other countries into the US. As a safe haven, the US always gets an inflow in every crisis, but the flow has been irrationally high because of the over-strong dollar. This is driving countries into balance of payments crises and loan defaults across the world.

The problem cannot be fixed by any one country or organisation. It requires collaborative action by all major economies. Such collaborative action resulted from the 1985 Plaza Accord of rich countries to tame a skyrocketing dollar. The world needs another Plaza Accord, and the G20 is the right forum to launch it.
The main hurdle today is the attitude of the US. At the time of the Plaza Accord, the US felt hurt by an over-strong dollar that caused a huge spurt in imports that threatened major industries, including steel and autos. So, the US was at the very vanguard of the move to weaken the dollar at the time.
Today, however, it seems content with a strong dollar. It views a strong dollar as a way to make imports cheaper and hence control US inflation, ignoring the impact on other countries.
Flawed logic
Ruchir Sharma, author and investment adviser, has argued that the US logic is wrong. He calculates that a 1% weakening of local currency raises US prices only 0.03%, but thrice as much in other rich countries and six times as much in developing countries. So, a weaker dollar will have little impact on US inflation but will greatly assuage inflation in the rest of the world. It will also diminish capital outflows from other countries.

The dollar has weakened significantly in the last month on expectations that the US economy is cooling, so the US Federal Reserve will slow the speed and extent of future interest rate hikes. Optimists hope the problem will sort itself out this way. But news reports say that hedge funds are betting on the dollar strengthening again.
India must flag this as a G20 concern, and initiate a debate on steps to weaken the dollar. If the Ukraine war ends and world inflation suddenly falls, maybe no further action is needed. But recent experience suggests that inflation is far more entrenched than economists imagined earlier.
Hope for the best but prepare for the worst. The G20 must start discussing the impact of an over-strong dollar and ways to combat it. Perhaps the mere launching of a discussion will help tame the rampaging dollar bulls. Or perhaps stronger action will be necessary. The opportunity must not be missed.
This article was originally published by The Times of India on November 26, 2022.

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