With the Fed’s Interest Rate Cut Finally Happening Will Dollar Hegemony Bring ‘Woe’ to the World Again?

On Sept. 18, the U.S. Federal Reserve announced a reduction in the federal funds rate target range of 50 basis points, down to a level between 4.75% and 5.00%. This marks the first interest rate cut by the Federal Reserve in four years.

At the end of August, the Fed’s most closely watched inflation index, the U.S. Core Personal Consumption Expenditures Price Index, had dropped to 2.6%. According to U.S. Department of Labor data, job growth in July was further revised downward from 114,000 to 89,000.

With inflation decreasing and growing concern about employment, an interest rate cut seemed inevitable.

However, the Fed’s actions once again reminded people of the famous saying of former U.S. Treasury Secretary John Connally: "The dollar is our currency, but it is your problem."

The high interest rate cycle in the United States has been incredibly damaging for the world economy. We can also see that dollar hegemony causes global pain.

The Global Economy Is Suffering

The Fed has been raising interest rates since March 2022 and the cumulative rate hike reached 525 basis points by July 2023, the most aggressive rate hike cycle in 40 years. It has also made the global economy suffer.

First, this aggressive rate hike policy has attracted a global flow of dollars back to the U.S., creating a siphoning effect on other economies leading to a lack of foreign exchange.

It’s easy to understand why. When the U.S. raises interest rates, deposit rates rise and people start converting other currencies into dollars in large quantities which flow back to the United States. With less money in circulation, the price of assets in other countries inevitably falls.

For other economies, the Federal Reserve's constant rate hikes have been like pulling the rug out from under them.

According to the Institute of International Finance, in the five months following the Federal Reserve's first rate hike in March 2022, emerging markets suffered five consecutive months of net capital outflows, totaling over $39 billion. This set a record for the longest period of continuous net outflows from emerging markets since 2005.

Second, the Fed's interest rate hikes also cause the dollar to appreciate and the currencies of other economies to depreciate. In turn, this weakens the ability of other economies to service their foreign debts. Reports have indicated that, on average, emerging market currencies depreciated by more than 1.5% against the dollar in 2024. The currencies of South Korea and Brazil have depreciated by about 6% against the dollar and Thailand’s currency has devalued even more sharply, by about 7.5%.

Low-income countries have been disproportionately affected. The African Economic Outlook report released by the African Development Bank in January 2023 pointed out that in 2022, Ghana’s currency, the cedi, had depreciated by 33% against the dollar. Irresponsible U.S. monetary policy has clearly escalated the debt problems of emerging and low-income countries, whose debts are mainly serviced in foreign currencies such as the dollar.

Interest rate cuts may not even give relief for other countries. During a long-term cycle of interest rate hikes, their own asset prices fall sharply. After the interest rate cuts, U.S. capital just flows everywhere again to buy assets at rock bottom prices.

This shows how U.S. monetary policy has a major impact on the world economy. As the dollar occupies an important position in international trade settlements and currency reserves, it effectively functions as a global public commodity and should be adjusted according to the global economic situation.

However, the U.S. has never regarded the dollar as an international public commodity. When the Federal Reserve adjusts its monetary policy, it only takes into account domestic interests, with no regard for the economic situation of other countries.

U.S. Currency, Global Problem

When the U.S. economy falls into recession, the country starts printing money to stimulate the economy, flooding global markets with capital, inflating asset price bubbles and making huge gains. When inflation rises due to too much money being printed, the U.S. tightens monetary policy and capital flows back to the U.S., leaving other countries with the depreciation, collapse in asset prices and debt crises that follow.

History has repeatedly demonstrated this pattern. When the oil crisis broke out in the 1970s, the United States was plunged into recession and the Federal Reserve adopted a policy of low interest rates to stimulate investment and jobs.

In the same period, several Latin American and African countries borrowed heavily in low-interest dollars in order to conduct oil exploration, to try and break the Middle East’s monopoly on oil production. Some countries were even encouraged by the U.S. to borrow money for oil development.

But reckless, long-term money printing led to a massive inflation crisis in 1979. When the U.S. had to face its inflation problem, it didn't consider the consequences for others. Then-Federal Reserve Chairman PaulVolcker aggressively raised interest rates, tightening the money supply. This appreciated the dollar and triggered a debt crisis in many countries.

After the 2008 global financial crisis, the Federal Reserve rolled out quantitative easing measures, printing massive amounts of money to rescue the market. This led to a global inflation crisis and a sharp increase in food prices.

Some analysts believe that this inflation and the food price spike contributed to the outbreak of the political crisis in the Middle East known as the Arab Spring. It has jokingly been said that the damage caused by Ben Bernanke (then chairman of the Federal Reserve) led to more destruction in the Middle East “than the CIA did in a decade.”

The United States succeeded in transferring its own economic crisis into a political crisis in other countries.

The Federal Reserve’s actions during the recent cycle of interest rate hikes and cuts have been no different. In response to the recession caused by the COVID-19 pandemic, the U.S. flooded the market with liquidity, printing and distributing money to stimulate it. But when the inflation crisis hit, the Fed responded with aggressive rate hikes, leaving other countries to suffer.

This brings us back to the opening quote, “The dollar is our currency, but it’s your problem.” The U.S. has long abused its monetary policy, putting its interests first and enjoying the benefits while other nations bear the brunt. This is the most intolerable aspect of dollar hegemony and is also why de-dollarization has become a hot topic in recent years.

Russia has introduced ruble settlement orders for “unfriendly” countries and regions; the Reserve Bank of India has implemented a rupee-based international trade settlement mechanism; and Israel has, for the first time in its history, added the Canadian dollar, Australian dollar, the yen and the yuan to its foreign exchange reserves while reducing its holdings of U.S. dollars and euros.

It is true that the whole world has suffered for a long time because of the dominance of the dollar. If the United States continues to abuse its monetary hegemony, other countries are bound to gradually reduce their reliance on the dollar and eventually the U.S. will reap what it has sown.