The drop in the U.S. dollar over the past year may have a silver lining for global trade, according to Oxford Economics’s head of global macro research.
That weakness in the buck could end up delivering a boost of more than 3% to the already growing global trade level in 2018, Gabriel Sterne said in his Oxford Economics note.
“Falls in the value of the dollar oil the wheels of the global financial system, boosting global liquidity by strengthening balance sheets and alleviating currency mismatches,” Sterne said.
The ICE U.S. Dollar Index DXY, +0.09% which measures the buck against six of its main rivals, has given up 2.6% year-to-date, and dropped 10% in 2017, according to FactSet.
Dollar weakness makes it cheaper to import dollar-denominated goods, which helps global imports. Much of global trade is invoiced in the U.S. currency, which is considered to be “stickier” than domestic currencies — so when the buck weakens, imports become cheaper.
Moreover, developing economies benefit because much of emerging-market debt — $3.5 trillion nonbank debt in 2017 — is denominated in dollars, and so the burden is lightened, thanks to the weaker buck. Balance sheets and credit conditions improve in response, according to the Oxford Economics report.
“Since the dollar is the global funding currency, changes in its value affect global credit supply conditions, especially credit supplied by banks. A stronger dollar tends to go with more subdued cross-border bank lending,” Sterne wrote.
With the dollar diving, its rivals are roaring, as currencies move in opposition with each other. That’s true for the buck’s emerging-markets counterparts; for example, the Taiwan dollar USDTWD, -0.0274% and the Malaysian ringgit USDMYR, +0.4213% have appreciated 5.6% and 12.6% versus the greenback over the past 12 months, according to FactSet.
Global trade cheer
Despite the worldwide turmoil in stock markets earlier this month, which sent jitters throughout financial markets, global economic growth is on track for a good year, the report said, giving some credit to the weak dollar.
Oxford Economics is forecasting 5% growth in world trade in 2018 — possibly more — as well as a further decline in the greenback and thus continued support for trade.
The inverse relationship between the dollar and global trade has been "remarkably strong since 2000, with a correlation of -68% between detrended world trade and dollar misalignments,” said Sterne.
Even when controlling for risk aversion and investors’ flight to haven assets, this trend holds, he said. That’s because the greenback is sometimes considered a haven in itself, while global trade tends to flounder when investors lose their appetite for riskier assets.
In the past, the correlation between the buck and global GDP has been stronger for an overvalued dollar rather than an undervalued one, Sterne noted.
In early 2017, when traders were still hopeful about the buck’s future in the early days of the Trump administration, the U.S. currency was overvalued. That created balance-sheet and liquidity squeezes, which will now have been alleviated.