The dollar's strength in 2020 will likely 'amplify' the negative impact of the coronavirus on global trade, the IMF warns
The IMF said in a report Monday that the US dollar's appreciation against many emerging markets in recent months may not necessarily increase demand for those countries' exports. Many countries exports are priced in US dollars, including oil. The IMF said: "There is growing evidence that most of global trade is invoiced in a few currencies, most notably the US dollar." "The global strengthening of the US dollars ... is likely to amplify the short-term fall in global trade and economic activity," the IMF said. Visit Business Insider's homepage for more stories.
The dollar's recent strength role may actually prevent emerging markets from experiencing higher demand for their exports as many of their them are priced in dollars, the IMF said Monday. In a note called "Dominant Currencies and External Judgement" the IMF noted that the dollar's dominance as a global currency can impact the way global trade works, and could make a global economic recovery from the coronavirus pandemic even more difficult. "The prevalence of dominant currencies like the US dollar in firms' pricing decisions alters how trade flows respond to exchange rates," the report noted. "The dominance of the US dollar in trade and finance is likely to amplify the impact of the COVID crisis," the report's authors said. Normally when the dollar depreciates against other currencies, it makes it cheaper for the US to buy goods dominated in other currencies that are facing the weakness. The dollar has appreciated against many emerging market currencies during the pandemic, raising hopes that this will make the exports of the countries whose currencies have depreciated more attractive. For example, the US dollar has appreciated almost 5% against the Indian Rupee since the start of the year. One dollar is currently worth 74.75 INR. But the dollar is also the world's most commonly used currency, and the world's top reserve currency, meaning that any depreciation is unlikely to boost demand for emerging market exports, the IMF said. The introduction of euro "initially reduced" the dominance of the US dollar, but the greenback has undoubtedly remained the world's most traded currency, it added. Dominant Currency Pricing The IMF noted: "There is growing evidence that most of global trade is invoiced in a few currencies, most notably the US dollar—a feature dubbed Dominant Currency Pricing or Dominant Currency Paradigm." "The share of US dollar trade invoicing across countries far exceeds their share of trade with the US. This is especially true in [emerging markets and developed economies] and, given their growing role in the global economy, increasingly relevant for the international monetary system," the IMF said. This means if export prices are set in US dollars or euros, a country's depreciation doesn't necessarily make the goods and services cheaper for foreign buyers, "creating little incentive to increase demand," the IMF explained. The prevalence of dominant currency pricing means the boost to the domestic economy facing the depreciation can be short-lived. Read More: BANK OF AMERICA: Buy these 9 stocks poised to crush the market in any market environment as they spend heavily on innovation One key example of this is petrodollars, where an oil exporting country is paid US dollars by the buyers of its oil. Read More: Leka Devatha quit a cushy corporate career to start flipping houses. She breaks down how she made $1 million on a single deal by supercharging a simple strategy. The petrodollar has been in place since the mid-1970s when prices rose to record levels. It was invented to help keep oil prices stable. It initially just included countries from the Middle East, but has been extended to members of the Organization of the Petroleum Exporting Countries and other countries over the past few years. An appreciation of the dollar against other countries' currencies also means that the depreciating countries' currencies will find it harder to buy US imports, reducing purchasing power.
The IMF concluded: "The global strengthening of the US dollar—which mainly reflects a flight to safe haven assets—is likely to amplify the short-term fall in global trade and economic activity, as both higher domestic prices of traded goods and services and negative balance sheet effects on importing firms, lead to lower import demand among countries other than the United States."Join the conversation about this story » NOW WATCH: Why thoroughbred horse semen is the world's most expensive liquid
More like this (3)
In the short term, probably not, but with China weaponising the yuan stern challenges lie aheadThe...In the short term, probably not, but with China weaponising the yuan stern challenges lie aheadThe recent sharp depreciation of the US dollar has led to concerns that it may lose its role as the main global reserve currency. After all, in addition to the Federal Reserve’s aggressive monetary easing – which threatens to debase the world’s key fiat currency even further – gold prices and inflation expectations have also been rising.But, to paraphrase Mark Twain, reports of the dollar’s early demise are greatly exaggerated. The greenback’s recent weakness is driven by shorter-term cyclical factors. In the long run, the situation is more complicated: the dollar has both strengths and weaknesses that may or may not undermine its global position over time. Continue reading...
Too much is being read into the greenback’s recent weakening against the euroThe dollar is in...Too much is being read into the greenback’s recent weakening against the euroThe dollar is in freefall! The global greenback is doomed! screamed recent headlines. Actually, such sensational headlines are “too sensational”, to echo that noted authority on currencies, Miss Prism, in Oscar Wilde’s The Importance of Being Earnest.The dollar’s fall in July to a two-year low against the euro was the immediate impetus for these stories. In fact, the dollar’s recent slide is one in a series of readily explicable fluctuations. When the Covid-19 pandemic went global in March, the dollar strengthened on the back of safe-haven flows into US Treasuries, as it does at the start of every crisis. By May, the Federal Reserve, acting as global lender of last resort, had accommodated this mad scramble for dollars by pouring buckets of liquidity into financial markets and the greenback gave back its early gains. Continue reading...
Deutsche Bank warns that investors are souring on the dollar because of a spike in US coronavirus cases
Investor demand for the US dollar as an emergency currency might be declining thanks to fears...Investor demand for the US dollar as an emergency currency might be declining thanks to fears of a second coronavirus wave, Deutsche Bank's chief Asia macro strategist told CNBC. "The exit strategy for the US, if anything, looks poorer than it is for the rest of the world," the bank's strategist Sameer Goel said on CNBC's "Street Signs." The outlook for the Chinese yuan seems increasingly favourable, Goel said. China's progress in global financial markets and its inclusion in various indexes is helping it gain traction. Visit Business Insider's homepage for more stories. Investor fears of a second wave of coronavirus have caused "multiple cross-currents" for currencies, and demand for the US dollar may be in decline, Deutsche Bank's Sameer Goel, chief Asia macro strategist, told CNBC on Monday. The US dollar has long been regarded as a default safe-haven currency because it is the reserve domination for international business deals. In times of market volatility, investors and traders convert their cash holdings into dollars for long-term protection. During worldwide coronavirus lockdowns, investor demand for the US dollar soared, but that demand now seems to be waning, Goel said. "The exit strategy for the US, if anything, looks poorer than it is for the rest of the world," he said. Read More: A notorious market bear says inexperienced 'zombie investors' are fueling a stock-market bubble — and warns that even the Fed won't be able to prevent another 30% crash Against a backdrop of resurgence in coronavirus cases, concerns over whether the US dollar should trade at a safe-haven risk premium is the "big question" for investors, and its value could weaken against peer currencies in developed markets, Goel said on CNBC's "Street Signs." His comments come after reports of a spike in coronavirus cases in the US and China over the weekend. An increase of more than 30,000 new cases in the US on Friday, June 19, represents the country's highest daily total since May 1, according to data from Johns Hopkins University. Goel said the outlook for the Chinese yuan is increasingly favourable. China's progression in global financial markets is being aided by its inclusion in various indexes and its introduction of more local-currency-denominated assets, he said. Despite recent US-China tensions and their clashes over the origin of the coronavirus, "it feels like at least the phase one trade deal seems largely secure, for now," Goel said. The Chinese yuan could be held back by the upcoming US elections in November if tensions between the two countries rise, he said. Read More: A 30-year market veteran explains why we're in 'one of the nutsiest bubbles in the history of bubbledom' — and warns of an 'underwater' economy for the next several yearsSEE ALSO: Wirecard stock plummets 37% after the payments firm says $2 billion in missing cash likely doesn't exist Join the conversation about this story » NOW WATCH: What makes 'Parasite' so shocking is the twist that happens in a 10-minute sequence