The U.S. dollar turned higher this week after the U.S. Federal Reserve cut interest rates and surprised markets by not signaling its intentions for future rate reductions. We have been talking about how the U.S. dollar's strength is becoming a factor both good and ill in company earnings, capital flows, and so forth. Earlier this year, Hyun Song Shin, economic adviser and research head at the Bank of International Settlements, owned by 60 central banks, offered an interesting take on U.S. dollar strength and how it affects international trade in a speech to European finance experts.
Shin's research includes looking at exports as a percentage of gross domestic product to create a proxy of global trade activity. Cross referencing this to the value of the dollar reveals a stark inverse relationship – the stronger the U.S. dollar, the less global trade in the world and vice-versa. This is an interesting observation in many ways. It is easy for U.S. exporters to blame their performance problems on a strong dollar and the rest of the world trying to take advantage with their relatively weak currencies to gain international market share.
But why does the strength of the U.S. dollar affect global trading as a whole? It speaks to the central role of the dollar in international transactions. Yes, the dollar is the world's reserve currency, but it is also the currency of a lot of trading relationships. China is the most prevalent example of how this works. Invoicing of intermediate goods in China, and Asia as a whole, still tends to be in U.S. dollars. This is partly due to convenience with past practice and that intermediate goods producers crave U.S. dollars to buy raw materials.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Tune in for a guide to ETFs and investing strategies for potential long-term success. View in a browser Fidelity Fidelity Log in Creating a portfolio with ETFs: Why and how Creating a portfolio with ETFs: Why and how
Exclusive webinar: The market, my portfolio, and options. Exclusive webinar: The market, my portfolio, and options. View in a browser Fidelity Fidelity Log in The market, my portfolio, and options The market, my portfolio, and options