The Strength of the US Dollar

The Rise of the Dollar

The ICE US Dollar Index rose just over 14% in 2022, marking its strongest performance since its launch in 1985. The Euro, Japanese Yen and British Pound fell to levels not seen since 1985. Emerging market currencies also weakened, including the Egyptian Pound, which fell 18%.

The Federal Reserve increased interest rates aggressively to combat inflation, which stood at 8.3%. Higher base rates make borrowing more expensive and encourage saving, reducing spending and slowing inflation. By late 2022, the Federal Funds Rate sat in the 3 to 3.25% range, compared with the Bank of England’s 2.25% and the European Central Bank’s 1.25%.

Exchange rates operate like prices determined by supply and demand. Higher interest rates attract foreign investors seeking better returns, increasing demand for the currency and raising its value. Political and economic stability also influence currency strength. UK leadership changes contributed to short‑term weakness in the Pound, and concerns over German energy shortages prompted companies like JP Morgan Chase to move some Frankfurt operations to the UK, signalling reduced confidence in the Eurozone economy.

Impact on Law Firms and Clients

A stronger Dollar increases the cost of servicing Dollar‑denominated debt. A Nigerian company, for example, must use more Naira to buy the Dollars needed to repay interest and principal. Combined with reduced consumer spending and rising energy costs, debt servicing becomes more difficult.

Companies heavily leveraged during Covid lockdowns, such as Cineworld with roughly $5 billion in debt, face heightened insolvency risk. This environment increases demand for restructuring, insolvency and contentious litigation work.

Distressed‑debt investors may also become more active. They buy debt at steep discounts, hoping the borrower recovers and the bond value rises. This trend would increase demand for corporate, capital markets, restructuring and funds lawyers.

Legal Risks for Distressed‑Debt Investors

Many distressed‑debt strategies rely on covenants allowing investors to force restructuring. Low interest rates and quantitative easing previously strengthened borrowers’ negotiating positions, enabling them to omit covenants. Without these protections, investors may be unable to restructure companies, putting their investments at risk.

Institutional investors often leverage their investments with debt to increase returns. These loans may contain restrictive covenants limiting the amount of distressed debt they can hold. Breaching these covenants could trigger defaults on the investor’s own borrowing.

Equity Sell‑Offs

US‑listed equities saw sharp declines on 13 September 2022: the Dow Jones fell 3.9%, the S&P 500 fell 4.3%, and the Nasdaq Composite fell 5.2%. Contributing factors included rising living costs, high energy bills, increased interest rates and the stronger Dollar raising debt‑servicing costs for non‑US companies listed in the US. These pressures reduce revenues and increase overheads, prompting investors to sell shares to avoid diminishing returns.

Challenger Banks Under Pressure

Jacob Rees‑Mogg wrote to Starling Bank seeking clarification on how it plans to recover bounce‑back loans potentially obtained fraudulently. UK banks lent around £47 billion through the scheme, and the government estimated that up to £5 billion could be lost to fraud. These loans are fully taxpayer‑guaranteed, meaning defaults directly impact public finances.

Starling distributed over £1.4 billion in bounce‑back loans, representing more than 40% of its lending book. Around 25% of these loans are in arrears, and Starling has already claimed £61 million from the taxpayer guarantee scheme. Rising interest rates and living costs will likely increase defaults and reduce demand for new lending. Starling may need new financing, restructuring or cost‑cutting measures. Reducing headcount, as seen with Klarna, would increase demand for employment lawyers. Falling confidence in challenger banks may push customers toward traditional banks, which could expand into the BNPL sector and acquire fintech companies, increasing demand for banking, corporate and competition lawyers.