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.
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“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.
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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.
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.
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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 producer Monsanto 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.
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.
In 1985, the U.S. and its allies were forced to band together in the so-called Plaza Accord to drive the dollar down after the currency’s appreciation led to an outburst of trade protectionism in America.
During the late 1990s, a rising dollar helped trigger a worldwide financial crisis that devastated the economies of Thailand, South Korea, Russia and Brazil.
While the currency’s advance this time hasn’t been as large, it is having an impact. Hooper and his team at Deutsche estimate it’s already enough to knock as much as 0.75 percentage point off annual U.S. output growth during the next several years by depressing American exports.
At the Peterson Institute for International Economics in Washington, senior fellow David Stockton now sees U.S. gross domestic product increasing 2.7 percent in 2015 and 2.4 percent in 2016. That’s down about a quarter percentage point from his October forecasts. Fourth-quarter GDP last year was 2.4 percent higher than a year earlier.
“There is going to be bigger damage” from the dollar, the former Fed official said, adding policy makers will be forced to raise rates more slowly than they currently envisage in response.
Partly in recognition of the dollar drag, U.S. central bankers lowered their median estimate for the federal funds rate at the end of next year to 1.875 percent at their meeting in March from 2.5 percent in December. The current target for the rate — which banks charge each other for overnight money — is zero to 0.25 percent.
The dollar’s surge is more-welcome news for the ECB and Bank of Japan, which are relying on weaker exchange rates to reinforce easier monetary policies and boost foreign demand and import prices. Declines in the euro and yen also may help lift business confidence.
In the 19-nation euro area, the single currency’s depreciation could boost growth by 0.3 percentage point this year and 0.5 point next year, according to Deutsche.
Citigroup Inc. economists identify Finland, Ireland, Germany and the Netherlands as the countries best positioned to benefit, given the volume of their trade and the sensitivity of their exports to foreign-exchange swings.
The euro’s decline is a “fairly sizable part” of why economists have turned more upbeat about the euro area, said Michael Saunders, Citigroup’s chief economist for Western Europe in London. He has raised his forecast for expansion to 1.5 percent from 1.1 percent at the end of last year. Growth was 0.9 percent in 2014.
As for Japan, Deutsche estimates a 10 percent drop in the trade-weighted yen bolsters growth by about 0.2 percentage point over two years, meaning the 30 percent drop since the middle of 2012 has supported the country’s efforts to escape deflation.
Less happy are many emerging markets that previously complained a weak dollar was propelling unwanted speculative capital into their economies.
The currency’s rebound now risks reducing the cost of commodities priced in dollars and increasing the burden of debts denominated in them. The rebound also could restrain the capital flows needed to plug current-account deficits and so force up local interest rates.
“A re-run of the crisis conditions of 1998-99 is unlikely, but there are areas of significant vulnerability,” said Adam Slater, a senior economist at Oxford Economics Ltd. in Oxford, England. He predicts the dollar’s strength will help reduce growth this year in emerging markets to the slowest pace since 2009.
Malaysia, Chile, Turkey, Russia and Venezuela are the most at risk, according to Slater. Close behind are Brazil, South Africa and Hungary.
India and China will fare better because they are net importers of commodities and their debt ratios are in line with historical averages.
China retains Asia’s fastest export growth — even with the rising yuan — and its leaders want to refocus the economy on consumption rather than investment, so the Chinese currency’s appreciation may assist the transition. Strength in the exchange rate also may help officials’ efforts to have the yuan used more widely abroad and added to the IMF’s list of world reserve currencies.
Still, the yuan’s gain will take its toll on growth that already is decelerating.
“It will certainly be a blow,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “The short-term effect seems not obvious as the trade surplus remains high, but in fact the economy’s competitiveness is hurt.”
The dollar’s rise is playing a “redistribution role” when it comes to global growth, said Charles Collyns, chief economist at the Institute of International Finance in Washington and a former U.S. Treasury Department official.
“That creates a little bit of turbulence, a little bit of uncertainty, but generally it’s a good thing,” he said.
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