Noteworthy trading edge

The US dollar's rise against the main currencies masks its fall to a 30-year low against those of emerging markets, generating record US exports

PUBLISHED : Saturday, 01 June, 2013, 12:00am
UPDATED : Saturday, 01 June, 2013, 4:19am

The surge that propelled the US Dollar Index to its highest level since 2010 has diverted attention from the greenback's 30-year low against emerging-market currencies, providing a boost for the Obama administration's export goals.

While the index tracking the US dollar against the euro, yen, British pound, Swiss franc, Canadian dollar and Swedish krona has risen 12 per cent from its lows in 2009, the currency is 18 per cent weaker than those in developing economies from its high that year as measured by the real trade weighted other important trading partners dollar index.

The broad depreciation suggests a rebalancing in which nations from China to Chile with the world's fastest growing economies make up a bigger slice of global demand. That may help President Barack Obama meet his goal of doubling United States overseas sales by the end of next year even as export growth has slowed annually every year since he took office.

"The dollar is, in fact, on a trade-weighted, inflation-adjusted basis, near its most competitive levels in over 30 years," said Robert Sinche, the global strategist at Pierpont Securities in Stamford, Connecticut. "Where you want the US to be competitive in the years ahead is in these emerging-market countries, where export potential is pretty significant, as they're growing faster than the developed world."

Goldman Sachs Asset Management chairman Jim O'Neill coined the term BRIC in 2001 to describe Brazil, Russia, India and China - the four emerging powers he estimated would equal the US in joint economic output by 2020.

Those nations invited South Africa to join their ranks in December 2010. Trade within the group surged to US$282 billion last year from US$27 billion in 2002, and may reach US$500 billion by 2015, according to Brazilian data.

As the global reserve currency, the US dollar has fallen against those of developing markets following the 2008 financial crisis as the Federal Reserve embarked on unprecedented economic-stimulus programmes. That included printing dollars to buy bonds in a policy known as quantitative easing.

"I'm not surprised to see the US on the weaker side because it's a byproduct of the QE," said Win Thin, the global head of emerging-markets strategy at Brown Brothers Harriman in New York. "That's why you're having complaints about currency wars and money flowing into emerging markets from the zero interest rates."

Even as policymakers around the world have cut borrowing costs - there have been more than 500 reductions since June 2007, based on Bank of America Merrill Lynch's count - most benchmark interest rates are still higher than that of the world's largest economy.

The US central bank's target rate for overnight loans between banks has been zero to 0.25 per cent since December 2008. The Bank of Korea's key rate is 2.5 per cent, Mexico's is 4 per cent and Poland's 3 per cent.

While the US dollar has strengthened 22 per cent over the past 12 months against the yen as Japan's government embarked on its own unprecedented stimulus plan, it has lost 11 per cent to Mexico's peso, 5.7 per cent to the Thai baht and 3.7 per cent to the yuan.

The Fed's programmes have driven investors into higher-yielding debt of emerging-market countries, giving policy makers there the choice between allowing their currencies to appreciate, potentially making their exports less competitive, or to depreciate, which tends to drive up inflation, Sinche said.

"US monetary policy isn't exactly the virtuous anchor that it was for so many years," Sinche said. For emerging markets, "you have to adopt very accommodative monetary policy, or else you need to break free and allow that appreciation to take place", said Sinche.


Obama has pledged to double exports to US$3.14 trillion in goods and services by the end of next year. Last year, they were a record US$2.2 trillion, a 39 per cent increase from 2009, when Obama took office, according to the Bureau of Economic Analysis.

US exports advanced 17 per cent in 2010 from the previous year as the economy began to recover from the global economic crisis.

The rate fell to 14 per cent the next year and was 4.3 per cent in 2012 as growth slowed in Europe. Globally, trade growth eased to 2 per cent in 2012 from 5.2 per cent the previous year, the World Trade Organisation said.




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