A disappointment in Q1 was the relatively modest growth of US exports, confounding economists who might have assumed that the weak dollar would rectify that problem.
As explained in his latest FX Focus, Citi’s Steven Englander points out that the connection between a weak currency and strong exports is dicey at best.
Here are the three main reasons why:
1) It may be small beer in the big picture. Productivity changes and the regulatory environment among other factors may in practice matter more than measured shifts. EM countries climbing up the quality ladder may matter more for growth in export markets than moves in the exchange rates.
2) How fast your exports grow also depends on how fast your export markets grow and how sensitive your export destinations are to price moves in your exports
3) Causality is uncertain. Sometimes the causal channel is that capital inflows will make a currency stronger and weaken exports. Sometimes the causal channel is that improved competitiveness will increase exports and simultaneously put upward pressure on the currency. Sometimes a combination of both forces is at play.
This chart is the killer. There’s just no correlation between US “competitiveness” (blue) and export performance.
Whether the US actually has a “weak dollar” strategy is up for debate. Certainly some countries do pursue this, and certainly the Fed has taken some actions that seem to have weakened the dollar.
But if the US does have a weak dollar strategy, at least when it comes to expanding exports, that doesn’t appear to be sound.
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