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Namrata L Ghanghatkar
30 September 2026 |
On 14 August 2026, the United States Bureau of Labour Statistics released the Consumer Price Index for July, showing headline inflation at 3.4 per cent annually and core inflation at 2.5 per cent. However, beneath these readings, the Federal Reserve remained deeply divided on whether to hold rates steady or begin tightening. The Federal Open Market committee voted 9 to 3 to maintain the Federal Fund rates, with all three dissenters calling for a hike, the first three way dissent in the same direction since 2016. The split reflected a genuine uncertainty; is inflation truly moderating, or is it merely pausing before structural pressures from an unresolved regional conflict and an expanding tariff regime pushing it higher again?
Why does almost everything trace back to the dollar?
The dollar's centrality in global finance is structural. The United States dollar is employed in 89 per cent of global foreign exchange transactions as of 2025, far exceeding the euro's 29 per cent share. Dollar denominated securities compose approximately 57 per cent of global foreign exchange reserves, valued at roughly 7.4 trillion dollars. No other currency approaches these figures. Countries that never borrowed from the Federal Reserve and conduct no direct trade with the United States nonetheless rely on dollars to buy oil, settle cross border transactions and hold reserves against economic shocks. This dependence originated from decisions made after World War II, particularly the Bretton Woods system established in 1944, which anchored global currencies to the dollar and the dollar to gold. When that system collapsed in 1971, the dollar's dominance persisted because no credible alternative emerged. The euro, despite representing an economic bloc comparable in scale to the United States, accounts for only 20 per cent of reserves. Efforts by the BRICS bloc to completely replace or dismantle the United States dollar have not succeeded, but they have driven a slow, partial shift toward bilateral local currency trade and alternative payment architectures rather than total systemic failure.
How do tariffs compound the squeeze?
The United States has implemented a patchwork of tariffs that creates vastly different effective rates across trading partners. Section 301 forced labour tariffs apply at 10 per cent baseline, but exemptions and carveouts result in significantly lower effective rates for some countries and substantially higher ones for others. Bangladesh, Pakistan, Indonesia and Cambodia face some of the highest effective tariff rates despite receiving headline rates of 10 per cent, because the administration applied fewer exemptions to these countries to address forced labour concerns. India negotiated its rate down from 50 per cent under prior policy to an effective 3.6 per cent after the Supreme Court invalidated earlier tariff authority and New Delhi doubled down on compliance with forced labour standards. Brazil faces an effective 16.4 per cent rate, while China faces 22.8 per cent as older tariffs from 2018 layer on top of the new Section 301 action.
Who actually pays?
Across Africa, governments face more than 90 billion dollars in external debt repayments this year, more than three times the 2012 figure. Egypt accounts for nearly one third of that, with 27 billion dollars in principal due. Pakistan depends on rolling deposits from Saudi Arabia, the United Arab Emirates and China that must be renegotiated regularly as global dollar liquidity conditions tighten. Nigeria's naira weakened from 770 to the dollar in 2023 to roughly 1,365 by 2026, eroding domestic purchasing power even as debt obligations in dollars remain fixed. In the United States, average hourly wage growth has slipped to 3.2 per cent year over year, while inflation at 3.4 per cent has wiped out these gains for the past four months. For emerging markets and vulnerable economies, the squeeze is more acute. A Fed that holds or hikes rates strengthens the dollar and raises global borrowing costs. Tariffs that cut into their export earnings reduce the revenues they would use to service that debt. These countries absorb the cost of United States monetary and trade policy decisions they did not make and cannot influence. The mechanism is clear; dollar centrality means that United States policy becomes a global constraint. Countries without dollar reserves or the ability to borrow cheaply in their own currencies or without any political leverage in Washington face a squeeze that tightens whenever the Fed shifts toward caution or the administration shifts toward protectionism. For these economies, the question is not whether they will absorb costs but how long they can do so before reserves deplete and debt becomes unserviceable.
References
“Consumer prices rose 0.1% in July, as expected, putting the annual rate at 3.4%,” CNBC, 14 August 2026
“Inflation remained stubborn in July as wages slowed for workers,” NBC News, 12 August 2026
“Africa faces $90 billion debt wall in 2026, S&P says,” Reuters, 3 February 2026
Lydia Boussour, “Consumer Price Index Report”, EY Parthenon, 12 August 2026
“The U.S. Dollar's Role as a Reserve Currency,” Federal Reserve Bank of St. Louis, 25 February 2026
“A visual guide to the new US tariff wall,” Atlantic Council, 6 August 2026
