Sri Lanka local currency ratings dip to 'Selective Default'

October 7, 2022

SINGAPORE --U.S. dollar strength has skyrocketed in 2022, posing problems for both advanced and emerging economies, yet there are no easy options for correcting its trajectory, says S&P Global Ratings in a report published today.

The U.S. dollar has risen 17% on a trade-weighted basis and by more than 20% against some currencies. This reflects relative -- and expected -- policy and market rate paths, and heightened risk aversion, S&P says.

"We appear to be entering the third dollar boom period in the past 50 years," says Paul Gruenwald, Global Chief Economist, S&P Global Ratings.

 "There is no easy solution: passivity endangers inflation targets and credibility, rate rises risk lower output and employment, intervention is likely to burn through precious reserves," he adds, noting that the 1980s solution -- global co-ordination -- requires a lot of political capital.

S&P says that for both advanced and emerging economies, the dollar's outsized strength triggers several problems, including higher imported inflation and the potential for higher rates, capital flow volatility, and higher debt service on U.S. dollar liabilities. Resolution may ultimately depend not just on economics, but on politics.

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