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S&P talks on consequences of changes in US dollar rate in 2023

Business 15:54 03 Jan, 2023
S&P talks on consequences of changes in US dollar rate in 2023

Strength in the US dollar could complicate an already uncertain outlook for emerging markets, although its recent easing may relieve some pressures on the most affected borrowers, reports according to a report by S&P Global Credit Outlook 2023.

“As it stands, 80% of EM corporate debt maturing in 2023 is in dollars, and about 24% is rated 'BB+' or lower. Continued dollar strength could trigger an increase in capital outflows and lead to a sharp rise in refinancing risk,” reads the report.

In Europe, dollar strength could fuel inflationary pressures. In the context of high-cost energy, which is mainly bought in US dollars, depreciation of European currencies amplifies inflation and makes it more difficult for the ECB to stabilize prices.

“According to our models, the depreciation of the euro against the dollar added approximately half a percentage point to inflation in the eurozone and reduced household consumption by the same amount. Overall, the prospect of higher-for-longer interest rates in the US could underpin the dollar and pressure other central banks to counter with more aggressive rate hikes. At the same time, a precipitous drop in the dollar’s value could also be problematic. While the recent easing of the greenback against other major currencies hasn’t increased market volatility, a quick or disorderly reversal could spur swings in financial markets and spell trouble for companies and investors that are caught off guard,” reads the report.