If US Dollar Weakens, Who Benefits?

The implications

Erik Norland, Senior Economist, CME Group

For the past eight years the US dollar (USD) has been on an upward trend, rising substantially against most of its peers. Support came from three sources:

1) An improving US fiscal situation from 2010 to 2016.
2) Substantially tighter monetary policy since 2016.
3) Stronger US growth than in Europe and Japan, especially in 2011-13, and since 2017.

The first of the three sources of support for the dollar was undercut in 2017 when the US budget deficit expanded from 2.2% of GDP in 2016 to 4.7% by mid-2019. Additionally, despite recent protectionist measures, the US trade deficit has expanded, rising from 2.5% to 3.0% of GDP. This has taken the so-called “twin deficits” from 4.7% to 7.7% of GDP.

For the past three decades smaller twin deficits have usually been followed by a stronger USD – often with a lag of 1 to 2 years. Meanwhile, expanding deficits have often been followed by a much weaker USD, often with a much shorter lag (Fig.1).

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