Dollar’s Rise Reshuffles Global Economy Into Winners and Losers

The rising U.S. dollar is redistributing growth throughout the global economy.

The greenback’s ascent to the highest in a dozen years on a trade-weighted basis is eroding the competitiveness of the U.S. and countries whose exchange rates track the dollar, including China. It’s also pushing down commodity prices, hurting producers such as Brazil, and threatening other emerging markets where companies borrowed in the U.S. currency when it was cheaper.

On the flip side, the euro area and Japan are cashing in as their companies gain the edge in world markets that economies need to boost growth. The likes of India are benefiting, too, by paying less for their energy imports.

“The dollar’s rise is sorting the world into winners and losers,” said Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York and a former Federal Reserve official.

The U.S. Dollar Index, which tracks the currency’s performance against six of its counterparts, has risen about 25 percent from a May 6, 2014, low as investors bet the U.S. expansion will outpace its trading partners and the Fed soon will raise interest rates while other countries retain an easy stance.

The dollar’s dominance will be high on the agenda when central bankers and finance ministers gather in Washington this week for meetings of the International Monetary Fund and World Bank. IMF Managing Director Christine Lagarde last week identified the dollar’s swing as a potential source of friction in the global economy as some benefit and others suffer.

Rebalancing Portfolios

Investors already are rebalancing their portfolios. The Euro Stoxx 50 Index has climbed 21 percent this year as traders bet on an upturn in the region’s economy. Airplane maker Airbus Group NV and cosmetics manufacturer L’Oreal SA are among companies hoping to take advantage of a cheaper currency.

The Standard & Poor’s 500 Index, in contrast, has lagged, rising just 2.1 percent. More than 40 percent of sales by companies in the index are from abroad, with seed producerMonsanto Co. and jewelry retailer Tiffany & Co. already warning that the stronger currency will restrain their profits.

Policy makers are adjusting, too. Fed Chair Janet Yellen and her colleagues are pointing to the dollar’s drag on the U.S. economy as they scale back how quickly they expect to raise interest rates for the first time since 2006.

Revive Inflation

Elsewhere, European Central Bank and Bank of Japan officials have turned a blind eye to sliding exchange rates in the hope they’ll provide the fuel necessary to revive inflation. In India, central bank Governor Raghuram Rajan has taken advantage of lower oil costs and ebbing price gains to cut interest rates twice this year.

Overall, the dollar’s rise may be a good thing for global growth.

“In an ideal world, economies with disinflationary trends — particularly the large, advanced economies — will have exported just enough deflation to the U.S. to stabilize inflation expectations and probably growth, too,” said Manoj Pradhan, a global economist at Morgan Stanley in London. “This would allow the U.S. to start the process” of raising interest rates.

The currency’s last two prolonged surges — in the first half of the 1980s and the latter half of the 1990s — nevertheless caused disruptions.


Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.