On the Road: US Dollar Back in Demand

  • by itradmin - Wed, 05/09/2018 - 13:04
US Dollars

After falling out of favor in foreign exchange markets for most of 2017 and the first few months of 2018, the US dollar (USD) is showing signs of life during recent weeks. This could be the start of a strengthening USD trend. Currencies can sometimes be tricky, particularly when seeing headlines like “US dollar plummets” or “drops” (or other verbs to which we typically attach a negative connotation).

However, for US exporters the weakening US dollar during the last year or so has been a welcome sight, particularly after seeing it spike in 2015 and 2016. US Exports, priced in USD, became comparatively cheaper in 2017 which helped push Total US Exports into Phase B, Accelerating Growth, from March 2017 through February 2018 (most recent data available). Exports are currently up 6.3% year over year and growing at the quickest pace since mid-2012. It didn’t hurt that the global economy and industrial markets were rebounding off an anemic 2016.

Unfortunately for US exporters, the good times could be nearing an end. The US Trade Weighted Exchange Rate Index, published by the St. Louis Federal Reserve, offers a look at how the US dollar is trending versus a subset of major currencies (includes the Euro Area, Canada, Japan, United Kingdom, Switzerland, Australia, and Sweden). The Index peaked, on a monthly basis, back in December 2016 and subsequently declined 10.1% from that level to a February 2018 low, indicating a double-digit percent decline in the aggregate exchange value of the US dollar. In the two months since, the Index inched higher (in March and April), and we are seeing a tentative rate-of-change reversal on a monthly basis, currently down 8.1% in April from the April 2017 level. While not statistically significant yet, it will be if this recent strengthening of the US dollar carries into the second half of the year.

A rising USD, compounded by a protectionist wave that may gain further traction in 2018, could provide a headwind for US businesses involved in the export of US goods. Manufacturers, distributors, and those in the transportation industry should think about lowering your expectations for later this year.

Connor Lokar
Economist