Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How the Strong Dollar Reshapes Global Supply Chains
Transcript
- Lucas: The US dollar is sitting around 119 on the trade-weighted index, and that number has been stubbornly high for months. For any company that buys raw materials or components in dollars but sells in euros or yen, that's a real margin squeeze. Luna: And we're talking about a broad range of industries here, not just oil or commodities. I was looking at a mid-tier German auto supplier, Schaeffler, and their CFO mentioned in a recent call that the dollar's strength is one of their top three risks. Lucas: Schaeffler is a good case. They make precision bearings and components for automakers. Many of their raw materials—steel, specialty alloys—are priced in dollars. But their revenue is mostly in euros. So when the dollar is strong, their input costs rise faster than their selling prices. Luna: What's their solution? I mean, they can't just raise prices overnight, especially with automakers pushing for lower costs. Lucas: Exactly. So they're doing what a lot of European firms are doing: shifting production closer to the dollar zone. Schaeffler is expanding a plant in Mexico, near Puebla, to serve the North American market. That way, their costs and revenues are both in dollars, or at least closely linked. Luna: So it's not about cheap labor anymore—it's about currency hedging through physical footprint. Lucas: Right. And it's not just Schaeffler. We're seeing this across sectors. The dollar's strength is essentially accelerating a trend that started with the trade wars: regionalization of supply chains. Companies want to produce within the currency zone where they sell. Luna: Which brings us to an interesting data point. The iShares MSCI Emerging Markets ETF, EEM, is up about 1.9% over the past five days. That's a bit counterintuitive if you think a strong dollar should hurt emerging markets. Lucas: It is. But part of that move is probably a rotation into markets that benefit from this regionalization. Mexico, for example, is a big beneficiary. The iShares Mexico ETF, EWW, is down slightly, but that's more about oil price noise. In the medium term, Mexico is gaining manufacturing share. Luna: And Taiwan—the Taiwan ETF, EWT, is up 4.5% over five days. That's a big move. Lucas: Taiwan is a different story. Their exports are heavily in semiconductors, which are priced globally and often invoiced in dollars. So a strong dollar actually helps their revenue when converted back to Taiwan dollars. Plus, they're a key link in the supply chain for AI and data centers, which are booming. Luna: So the strong dollar isn't uniformly bad. It depends on whether you're a dollar-cost company or a dollar-revenue company. Lucas: Exactly. And that's the nuance that gets lost in the headlines. For a company like Schaeffler, the dollar is a headwind. For a Taiwanese chipmaker, it's a tailwind. But the broader point is that currency pressure is forcing structural changes, not just quarterly earnings adjustments. Luna: Let's talk about trade finance. How does a strong dollar affect the actual financing of cross-border trade? Lucas: Trade finance is typically denominated in dollars—about 80% of letters of credit are in dollars. When the dollar is strong, companies in emerging markets that import goods have to pay more interest and fees because their local currencies are weaker. That can slow down trade volumes. Luna: And we're seeing that in the US trade balance data, which just came out for March. The deficit widened to about $60.3 billion, up from $57.8 billion. Imports are rising. Lucas: Right. The strong dollar makes imports cheaper for US consumers and companies, which boosts imports. But it also makes US exports more expensive for foreign buyers. So the deficit expands. That's classic textbook economics. Luna: But here's the twist: the trade-weighted dollar has actually slipped a tiny bit in the past week—from 119.03 to 118.9. Not a big move, but maybe a signal. Lucas: It could be profit-taking or positioning ahead of the Fed's next meeting. But the longer-term trend is still a strong dollar. The yen is at 159 to the dollar, the yuan at 6.77. Neither is showing signs of a rebound. Luna: Which brings us back to supply chains. If the dollar stays strong, do you think we'll see more companies like Schaeffler moving production to the Americas? Lucas: Absolutely. And not just to Mexico. We're seeing some reshoring to the US itself, especially for higher-value goods. The Inflation Reduction Act and the CHIPS Act created incentives, but the dollar is adding a natural incentive on top. It's cheaper to build a factory in the US if your inputs are dollar-denominated and your customers are here too. Luna: What about the financial side? How are multinationals managing this risk aside from moving factories? Lucas: They're using more sophisticated hedging strategies. Some are issuing bonds in foreign currencies to match their revenue streams. Others are using cross-currency swaps. But the simplest hedge is still operational: align your cost base with your revenue currency. Luna: And that's exactly what Schaeffler is doing. It's not a flashy financial engineering story—it's a real-world operational pivot. Lucas: Which is the kind of story we like to dig into on this show. If these conversations have helped you think differently about your own business or investments, and you'd like to keep the show ad-free and independent, you can support us at buy me a coffee dot com slash fexingo. Luna: Yeah, every bit helps us keep bringing these detailed, on-the-ground perspectives. It's listeners like you who make this possible. Lucas: So back to the broader picture: the strong dollar is reshaping not just trade flows but the geography of production itself. Whether that leads to a more fragmented or more resilient global economy is still an open question. Luna: And it's a question every multinational is trying to answer right now. Thanks, Lucas.