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Monday, December 8, 2008

Export / Dollar Worries Not as Bad as You Think

A lot has been discussed of late as to type of impact the global slowdown will have on both exports and the dollar. The thought is that the slowdown will decrease our exports (true) and that will decrease demand for dollars, which pay for said exports.

Of course there is another side of the story, imports. In a slowing U.S. economy, we will be importing significantly less from abroad. Items we will be importing less of are commodities (which have also priced significantly lower) and consumer goods (which are under severe pressure as the U.S. consumer delevers).

What have we seen? While service (non-manufacturing) exports are indeed falling faster than imports, the 12 month average is still positive. On the other hand, the manufacturers index actually shows the reverse (i.e. imports falling faster, likely due to the crash in commodity prices).

Given all of this and the economic problems associated with global markets, I am not a dollar bear. I definitely feel there will be weakening in the absolute value of a dollar (i.e. inflation) at some point due to the oversupply, but I expect this to happen across all currencies. Thus, the relative weakness of the dollar (which matters for exchange rates) won't be nearly as problematic. HOWEVER, I do think some / a lot of the move we've seen over the past few months was largely due to the deleveraging of global investments, and I do expect that to reverse in the coming months.

Source: ISM