This year the US dollar has appreciated by 10% against other major currencies. The main reason behind this is the US Fed increasing interest rates in tackling the inflationary pressure in its economy – since the beginning of the year the Fed Funds rate has increased from 0% to 2.25-2.5%. This increase in interest rates has been quicker than other major economies which has led to the strengthening of the US dollar. This stronger dollar makes US exports less competitive and imports cheaper as the US dollar buys more of the other currency. However even if a country doesn’t trade with the US it can still be impacted by the US dollar when pricing goods and services. The problem lies in the invoicing of fuel and food which is usually quoted in US dollars – an IMF paper suggested that approximately 40% of invoices are in US dollars – see Figure 4 below. Furthermore they also found prices for businesses doing trade between two distant countries can be much more sensitive to the value of the US dollar than the relative levels of the tow local currencies.
With the US Fed focused on inflation further interest rate increases on the cards which could lead to further strengthening of the US dollar. To counter this action other countries central banks could increase their interest rates ahead of time to protect their currency.
The graph above reveals that the share of global exports invoiced in dollars is much larger than the share of exports destined to the US. This difference indicates that the dollar plays an outsized role in the invoicing of global exports; the patterns for imports are quite similar. The right panel of Figure 4 establishes that the dollar’s leading role reflects more than its use for the invoicing of commodity exports: once exports of commodities are removed from both the invoicing and export shares, the dollar share of invoicing (23%) still exceeds – by a sizeable margin – the share of exports destined for the US (10%). Figure 4 also reveals that the euro’s share in global export invoicing is an impressive 46%. While this appears as a very large number, recall that a currency’s vehicle currency role can be gauged only by comparing its share in global invoicing to the share of global exports that involve the jurisdiction issuing the currency. This comparison reveals that the euro’s share in global export invoicing is not much larger than its share, 37%, of exports destined to EA countries.
Strong dollar is a major headache for other countries. FT 30th July 2022
IMF – Patterns in Invoicing Currency in Global Trade. Emine Boz, Camila Casas, Georgios Georgiadis, Gita Gopinath, Helena Le Mezo, Arnaud Mehl, Tra Nguyen. July 2020