The International Monetary Fund (IMF) has recently noted that as inflation has skyrocketed across the globe, many countries are finding that the weakening of their currencies against the dollar has worsened the inflation their nations are suffering. This is due largely to most trade internationally, especially for energy, being conducted in the dollar.

In response, the IMF has issued a report detailing how other nations can respond to the strengthening of the dollar. It noted the dollar has reached its highest relative level since 2000, appreciating 22% against the Japanese yen, 13% vs the euro, and 6% against emerging market currencies year to date.

The lender noted, “Such a sharp strengthening of the dollar in a matter of months has sizable macroeconomic implications for almost all countries, given the dominance of the dollar in international trade and finance.”

It also noted that as there has been a decline from 12% to 18% in the US share of world merchandise exports since 2000, the dollar’s share of world exports has held steady at around 40%. It went on, “On average, the estimated pass-through of a 10 percent dollar appreciation into inflation is 1 percent. Such pressures are especially acute in emerging markets, reflecting their higher import dependency and greater share of dollar-invoiced imports compared with advanced economies.”

The report noted that about half of all cross-border loans and international debt securities are denominated in US dollars. Even as emerging market governments make progress in using their own currency to issue debt, their private corporate sectors maintain high amounts of debt denominated in dollars.

The IMF went on to say, “As world interest rates rise, financial conditions have tightened considerably for many countries. A stronger dollar only compounds these pressures, especially for some emerging market and many low-income countries that are already at a high risk of debt distress.”

The IMF concluded nations should allow the exchange rates to adjust, as they use monetary policy to maintain inflation as close to their targeted rates as possible. It said, “The higher price of imported goods will help bring about the necessary adjustment to the fundamental shocks as it reduces imports, which in turn helps with reducing the buildup of external debt. Fiscal policy should be used to support the most vulnerable without jeopardizing inflation goals.”