The US dollar is struggling. That should give a shot in the arm to global growth, says Goldman Sachs


A worker from the Chinese company Shanghai Zhenhua Heavy Industries runs past one of the two blue giant portico cranes Malaccamax, during their unloading on 23 July 2020, at the port of Fos-sur-Mer, on the outskirts of Marseille, southern France.

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The US dollar is struggling, and the market is betting that the greenback has more room to fall.

The trade-weighted dollar has fallen 7% since the peak of March, and Goldman Sachs expects the dollar to be DXY,
+ 0.03%
glide to reach 15% from the highs.

That could give a shot in the arm to global growth, analysts at Goldman Sachs say. Because the dollar is the world’s reserve currency, much of the world trade is denominated in dollars, even if the US is not a counterpart. This is especially true for emerging markets, where the share of international trade invoiced in dollars is close to 100%.

Depreciation of dollars therefore reduces the cost of local currency of imports and thus increases import demand, trade volumes and exports. Analysts including Sid Bhushan and Daan Struyven say that a 10% dollar depression against all other currencies is associated with a 5% increase in the volume of global non-US trade.

See also: Fed adopts new inflation strategy, generally seen as leading to easier policies.

Similarly, about two-thirds of global cross-border credit is denominated in dollars, so dollar depreciation stimulates the balance of these lenders with key assets of local currency. True, a weaker dollar is bad news for lenders, “but their spending margin is likely to be significantly smaller than that of dollar lenders,” Goldman analysts say.

Another point is the dollar is often the currency in which global investors measure their returns. “As the dollar depreciates, the rise in the dollar value of assets in local currencies relaxes the lending and risk constraints of investors. This will lead to larger positions in assets of local currencies, which in turn will feed into higher local prices, easier financial conditions of emerging markets, and stronger domestic activity, ”they say.

Also read: Why Bulls Emerging Markets Rejoice a Weaker U.S. Dollar

The S&P 500 SPX,
+ 0.08%
has climbed 55% from the March low, and the index has gained 8% this year.

The MSCI 892400,
+ 0.88%
world index is up just 3% this year.

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