Dollar’s Gains Muted as U.S. Embraces Emerging Markets

By Andrea Wong

Photographer: Ron Antonelli/Bloomberg

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Changes in U.S. trade over the past decade are damping concern among foreign-exchange traders that a strengthening dollar will curb economic growth by making American goods less competitive in global markets.
While the greenback has soared almost 6 percent since mid-year against major currencies such as the euro and yen, its gains have been more modest versus other economies, appreciating about 1 percent on average, as measured by Federal Reserve trade-weighted indexes.
That’s important because developing nations now account for 51 percent of U.S. trade, up from 41 percent in 2004, according to data compiled by Bloomberg. Evidence of the dollar’s benign effect on the U.S. economy may make it easier for the Fed to raise its main interest rate from near zero.
“The USD is trading within tight ranges -- what this does is keep exports to
emerging-market countries competitive,” Douglas Borthwick, the head of foreign exchange at New York brokerage Chapdelaine & Co., said yesterday by phone. “The dollar is rising versus the euro, against the yen, but less so against emerging-market currencies.”

Rising Exports

U.S. exports rose to a record $198.6 billion in August, before easing to $195.6 billion in September. In September 2004, they totaled $98.3 billion.
Amazon.com Inc., Apple Inc., International Business Machines Corp. and McDonald’s Corp. have complained about the stronger dollar in recent months, saying it’s hurting their earnings and revenue outlook.
While overseas shipments make up 14 percent of the economy, companies in the Standard & Poor’s 500 get about 47 percent of their sales abroad, according to JPMorgan Chase & Co.
“The dollar strength really kicked in toward the end of the third quarter, meaning we’ll hear about corporate earnings being affected early next quarter,” Axel Merk, president and founder of Palo Alto, California-based advisory Merk Investments LLC, said by phone on Nov. 7.
Federal Reserve Bank of Dallas President Richard Fisher told reporters in New York on Nov. 3, a higher exchange rate makes imports less expensive, boosting domestic consumption, which accounts for 68 percent of the economy.
“Even if we had a big move in the trade-weighted dollar, it would have a muted effect on U.S. economic activity,” Collin Crownover, the head of currency management at State Street Global Advisors Inc., said by phone from Boston on Nov. 10. A stronger dollar may even be “a net benefit” for the world’s largest economy by making imports cheaper, he said.

Relative Gains

A trade-weighted gauge of the dollar maintained by the Fed against emerging-market currencies rose to 94.6 last month, up 1 percent since the end of June to the highest level since 2012. China and Mexico alone account for 30 percent of U.S. trade, up from 22 percent a decade ago.
Another of the Fed’s gauges that tracks the greenback against developed-nation currencies is at its highest level since 2009, or 91.6, after rising 5.6 percent.
By pulling back on stimulus measures put in place after the global financial crisis and setting the stage for its first rate increase since 2006, the Fed is distancing itself from Japan and the euro region, where easing policies have sent their currencies tumbling to multi-year lows.
Other major economies may be less tolerant of a stronger currency than the U.S. Developed markets account for about 70 percent of the European Union and U.K.’s imports and exports, compared to about 80 percent a decade ago, according to data compiled by Bloomberg.

Paying Dividends

That helps explain the currency depreciating policies which sent the euro to a two-year low of $1.2358 on Nov. 7 and the yen to a seven-year low of 116.10 per dollar two days ago. The shared European currency fetched $1.2456 as of 9:49 a.m. in London, while the yen traded at 115.60.
For the U.S., the push into emerging markets is paying dividends. The deficit in its current account, the broadest measure of trade, shrank to 2.3 percent of gross domestic product in the second quarter, the smallest since 1998.
While emerging-market growth is showing signs of cooling, the International Monetary Fund predicts growth will still be more than double that in their developed peers this year and next.
“The overall trend of the current-account balance has been improving,” Athanasios Vamvakidis, head of Group of 10 foreign-exchange strategy at Bank of America Merrill Lynch in London, said by phone on Nov. 5. “The rise in the dollar is fully consistent with fundamentals.”