Drewry: Strong US Dollar Cuts Both Ways

A rapidly appreciating US dollar is helping exporters in some trading nations but not all, Drewry Maritime Research says. So, who is seeing the biggest lift to their export competitiveness, and who cannot keep up the pace?

The US dollar is currently in hyper drive, appreciating at its fastest rate in decades. The US Federal Reserve’s trade-weighted average of the foreign exchange values of the US dollar against a basket of major currencies shows that the greenback has jumped 9% since the end of 2014 and by 20% since March 2014, says Drewry.

The appreciation has been much steeper against some currencies, most notably the Brazilian Real and Japanese Yen, giving exporters in those countries a significant competitive boost.

But having weaker currencies benefited some countries in the container trade with the US, but not others, says Drewry.

The biggest winners last year were undoubtedly Brazilian exporters. Brazil’s container exports to the US jumped by 25% in 2014, enough to see it jump three places to become the second single largest exporter to America in tonnage terms. The real’s depreciation against the dollar was larger than other major currencies due to falling commodity prices and the recessionary state of the Brazilian economy.

Indian container exports also received a significant leg-up from its currency depreciation with tonnage to the US rising by 23% in 2014. All things are relative and India’s weaker position to Brazil will be of concern for the export of competing commodities such as coffee, according to Drewry.

However, the currency exchange did not negatively impact US exports to the same countries. US to Brazil container tonnage increased by 14%, while Indian imports of US containerised goods rose by 8%. They may struggle to reach such heights in 2015 if the dollar continues its trajectory, Drewry predicts.

The competitive boost handed to Brazilian and Indian exporters did not unduly harm other nations with lower exchange rate movements against the dollar. For example, South Korea’s box exports in tonnes increased by 12% last year even though the won appreciated mildly against the dollar.

China increased its tonnage to the US by a smidgen under the average at 7.5%. This kept China’s market share at around 36% with nine times the size of Brazil’s tonnage. It was a similar story for the Euro area trading bloc. The euro’s depreciation since the start of this year should encourage more westbound Transatlantic container traffic.

Japan stands out as the exception. Despite the yen losing about 15% of its value against the dollar through 2014, Japanese exports to the US fell by 7% in tonnage terms.

It’s difficult to pin down the precise reason why the currency depreciation/higher exports equation has broken in Japan, says Drewry,  but some explanations range from its goods being too pricey as firms look to hold on to profits, acceleration in outsourcing, and its hi-tech products losing their appeal against foreign competitors.

The story is set to continue through 2015 as the dollar is widely expected to strengthen further. The Federal Reserve has ended its quantitative easing (QE) programme (the opposite to the European and Japanese central banks) and has signaled that it will raise interest rates soon, making it even more attractive to investors. Further appreciation of the dollar will undoubtedly boost US imports, with emerging economies and Eurozone countries at the front of the queue, says Drewry.

However, the dollar’s stratospheric rise contains significant risk for emerging nations. Companies that borrowed heavily in dollars – the Bank for International Settlements said there were USD 9.2 trillion of dollar loans outside the US as of September last year, a rise of 50% since 2009 – are now seeing those loans become much more expensive to pay off. Numerous sugar producers in Brazil have already succumbed (also due to low commodity prices) and high profile firms in India and China are also struggling with inflated dollar debts.

Higher exports at the cost of a wave of bankruptcies and job losses is not much of a trade-off for those nations and could well prompt policy measures that would work against exporters.

Drewry believes that emerging nations with goods that America wants will benefit most from the container import drive of the US in 2015. However, US exporters stand to suffer from the rising dollar and potentially weaker trading partners.