Meta Thread: Currency Strength

Index

• Advantages, benefits of the strong USD in America
• Disadvantages for the US of a strong dollar
• Reasons for the strong dollar. Causes.
• Current Status

Advantages, benefits of the strong USD in America

15-Sep-2022

• Two key areas are tourism and Investment…
  • The US consumer benefits from cheaper overseas products.
  • They will also benefit when travelling abroad.
  • And the tourist country benefits from the average US citizen spending cash in their country.
• US investors benefit by being able to benefit from buying discounted assets overseas.
• Possible negative effect on US inflation. With 1% annualized sequential decline in import prices in the three months to July will likely transmit into the core CPI…Second had cars in the US could be driven down by the strong dollar, and this could feed into CPI, thus reducing overall inflation numbers.

Disadvantages for the US of a strong dollar

15-Sep-2022

• US firms would find it more expensive to compete in foreign markets.
• US produced own goods will suffer a higher cost of manufacturing and labour than overseas, specifically in the APAC region.
• Inward tourism can be curtailed, with the cost of inward bound tourism from overseas visitors ameliorating. Airlines and hotels would perhaps see a decline in revenue from visiting tourists, but Airlines will benefit from outbound tourists flying from the US taking advantage of the strong dollar, especially since lockdowns have ended.
• A strong dollar would prevent some very necessary foreign investment, especially in medicine, pharma and computer hardware, microprocessors and chips.
• Intuitively when the dollar is strong, EM economies would not buy US assets. But this is not the case. Usually, when the dollar is particularly strong, or entering a period of growing dollar strength, there is some systemic global economic issue. Such as the recent energy inflation crisis. This can cause outflows in developing and EM markets. Therefore there is a flight to safety, which is first and foremost US treasuries.
• UK FTSE100 and 250 firms foreign earnings, will be seeing a lift in sterling terms.

Reasons for the strong dollar. Causes.

15-Sep-2022

• Driven largely by rising U.S. interest rates.
• When putting money into American stocks and bonds, foreign investors typically use dollars, which boosts the U.S. currency.
• Emerging markets had $4 billion in net outflows in June.
• Countries that issue debt in foreign currency are at risk when their currencies depreciate because that debt becomes more expensive to pay off.
• Sri Lanka, for example, fell into default in May. A combination of crushing debt and rampant inflation has left the country without U.S. dollars to pay for imports of basic goods such as fuel and medicine.
• Emerging-market countries have varying degrees of their debt in dollars. Dollar-denominated debt issued by governments in Argentina, Ukraine and Colombia all exceeded 20% as a share of their GDP as of the first quarter, according to the IIF, while that figure is below 2% for a handful of Asian and European countries.

Current Status

15-Sep-2022

• While currencies in emerging markets typically feel pressure when investors flock to a strong dollar, those of developed countries also have fallen. Dollar-denominated debt is less common than it used to be. The biggest players — such as Brazil, Mexico and Indonesia — “generally haven’t borrowed a lot in foreign currency and now hold enough foreign exchange reserves to manage their external debt load,”.
• Plus, prices of commodities like oil and base metals remain high. That helps emerging economies that are major exporters, including many in Latin America, and serves as a reliable way to ensure dollars are still flowing to government coffers.
• Indices:-
  • WSJ Dollar Index

Developed Vs EM markets

• The ability to hedge risks can make emerging-market governments more resilient to periods of currency depreciation than in the past, said Mr. Brooks of the IIF, and many have navigated the pandemic without systemic breakdowns. Smaller economies such as those in sub-Saharan Africa are more vulnerable.
  • Exporting countries can also fare better against a strong dollar because they have access to U.S. currency and are less reliant on imports with rising prices.
• About half of international trade is invoiced in dollars, running up bills for manufacturers and small businesses that rely on imported goods. Those governments that need to repay their debts in dollars would clearly run into trouble, if reserves run low. The dollar’s gain is already hurting some vulnerable economies.
• Pakistan’s currency has taken a significant hit in the past 3 months to a record low against the dollar. This weakness nearly resulting in default.
• And Egypt — seriously hindered by rising food & agri prices — alongside a depleted store of dollars and a flight of foreign investment. The International Monetary Fund now intervening.
• It can add fiscal strain. Not every country has the ability to borrow money in their local currency, since foreign investors may not have faith in their institutions or they have less developed financial markets. That means some have no choice but to issue debt denominated in dollars. But if the value of the dollar shoots up, that makes it more expensive to repay their liabilities, draining government coffers.
• It also makes it costlier for governments or businesses to import food, medicine and fuel. That’s what happened when the value of Sri Lanka’s rupee crashed against the dollar earlier this year. The government drained its foreign reserves, which were already low in part due to a slump in tourism during the pandemic.