Krishen Rangasamy, analyst at National Bank Financial, suggests that it’s not clear whether the global economic slowdown is propping up the USD, or is the latter causing the former?
Key Quotes
“The direction of causality isn’t clear cut. As we saw recently, concerns about a weakening world economy could trigger risk-off sentiment in financial markets and lift the USD via safe-haven capital flows. Conversely, a stronger USD may hurt the global economy by making it harder for dollar credit to be serviced.”
“Also, a strong USD has potential to curtail trade volumes, with negative repercussions on the global economy. According to the Bank of International Settlements, roughly 65% of global trade is financed by firms themselves and 35% is financed by the banking system. And around 80% of the financing from banks is denominated in US dollars. Simply put, a significant chunk of global trade is financed by the banking system in US dollars.”
“So, if the cost of financing (e.g. USD exchange rate) rises, that will slow lending and borrowing in US dollars hurting trade volumes and hence world GDP growth. Regardless of the direction of causality, there is a clear correlation between the Broad Dollar index and global trade volumes.”
“The two tend to move in opposite directions. Global trade is even more strongly negatively correlated with the Emerging Market Economies Dollar index, not a surprise considering emerging economies tend to be more dependent on trade than the OECD. As such, the recent leg of USD appreciation is not a positive development for the global economy.”
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