Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / The New Trade Routes Around a Weaker Dollar
Transcript
- Lucas: So the trade-weighted dollar index has slipped to 120.7, down from its highs earlier this year. And yet the US trade deficit just widened to over 77 billion dollars in May. That's a record for this cycle. Luna: Wait, that seems backwards. Weaker dollar should make exports cheaper and imports more expensive, narrowing the gap, right? Lucas: That's the textbook story, and it's what most people expect. But the data keeps telling a different story. Imports are actually up to 4.6 trillion dollars annualized, while exports are lagging behind at 3.75 trillion. The deficit is widening even as the dollar falls. Luna: So what's breaking the classic relationship? Is it just a lag effect, or is something structural going on? Lucas: Some of it is lag, sure. But I think there's a deeper structural shift. The dollar's decline has been pretty modest, maybe 3 percent on a trade-weighted basis since last year. But more importantly, the composition of trade has changed. Think about what we import now: a lot of it is things like electronics, pharmaceuticals, and capital goods. These have pretty inelastic demand. Even if prices rise, we still buy them. Luna: Right, and the US consumer just keeps spending. That demand for foreign goods isn't going away because of a slightly cheaper dollar. Lucas: Exactly. And there's another angle: the dollar isn't weak everywhere. Against the yuan, it's been pretty stable, around 6.77. Against the yen, it's still strong, at 163.7. So the 'weaker dollar' is really a mixed bag. It's weaker against the euro and some emerging market currencies, but not against key Asian exporters. Luna: So for a lot of our trading partners, the dollar hasn't actually fallen that much. That would explain why exports aren't getting the boost you'd expect. Lucas: Precisely. And that's the nuance that gets lost in the headline 'dollar down, deficit up' story. The trade-weighted index masks a lot of variation. For instance, the Mexican peso has appreciated notably against the dollar over the past year. That should make Mexican goods more expensive for US buyers, and it has, to some degree. But Mexico has also become a critical hub for nearshoring, so the volume of trade has exploded anyway. Luna: That's a great point. The MSCI Mexico ETF is up, and we're seeing all these companies shift production there. So even with a stronger peso, the dollar value of imports from Mexico keeps climbing. Lucas: Right, and that's the thing. When you look at the trade data, it's not just about price. It's about supply chain decisions that were made years ago. Companies that committed to manufacturing in Asia or Mexico aren't going to reverse those decisions just because the currency moved a few percent. Luna: So the elasticity that economists used to rely on is just gone. It's more about strategic sourcing than price signals. Lucas: Yeah, and that's why you see this paradox. The dollar has weakened, but the trade deficit is at a fifteen-year high. We talked about that in a previous episode, but now we're seeing it continue. The May data shows the deficit ballooned by over 20 billion dollars in just a month. That's a huge swing. Luna: So what's driving that spike? Is it a one-off or a trend? Lucas: A lot of it is probably front-loading. Companies were worried about new tariffs, so they rushed to import goods before they got hit. But there's also the fact that US consumer demand remains incredibly robust. The economy is still growing, unemployment is low, and wages are rising. So people are buying. Luna: And that's not going to change just because the dollar is a bit weaker. I mean, if you want that new phone or that specific car model, you're going to buy it regardless of the exchange rate. Lucas: Exactly. And that brings me to a specific case that I think illustrates this whole dynamic: the semiconductor industry. We've talked about AI chips and export controls, but here's the trade angle. The US still imports a huge amount of semiconductors, especially from Asia. Even with all the reshoring efforts, the dollar value of those imports keeps rising. And because the dollar hasn't fallen much against the yen or the yuan, there's no price relief. Luna: So even if the dollar weakens, the price of those chips doesn't go up much for US buyers, because the currencies haven't moved in tandem. That keeps demand high and the deficit wide. Lucas: Right. And then you have the other side: US exports. The weaker dollar should make US goods cheaper for foreign buyers, and that's true in Europe, for example, where the euro has strengthened. But the US doesn't export as much to Europe as it does to Asia. And in Asia, the dollar is still strong, so US goods aren't getting that price advantage. Luna: So it's a story of divergent currency moves, and that's what's messing with the trade balance. Lucas: Exactly. And there's another layer: the current account deficit is also widening, now at 226 billion dollars. That's not just trade in goods, it includes services and income. So the whole external position is deteriorating, not just the goods trade. Luna: And that has implications for the dollar itself, right? A wider deficit usually puts downward pressure on the currency. So we could be in a self-reinforcing loop. Lucas: That's the risk. But so far, the dollar has been supported by the fact that US interest rates are still relatively high, and investors see the US as a safe haven. So the deficit widens, but the dollar doesn't fall as much as you'd expect. It's a strange equilibrium. Luna: So is the weaker dollar actually doing anything positive for US exporters? Or is it just not enough to move the needle? Lucas: It's helping at the margins. Some manufacturers are seeing better margins on exports to Europe. But the overall volume hasn't jumped because the price elasticity is low. And for many companies, the bigger factor is global demand, not the exchange rate. If Europe and China are slowing, US exports won't grow much regardless of the dollar. Luna: That makes sense. So the real story isn't the dollar per se, it's the structure of global trade. We've built supply chains that are resilient to currency moves, and that's why the textbook relationship is broken. Lucas: Exactly. And that's what we should be watching. Not just the dollar index, but how companies are actually sourcing and selling. The currency is just one factor, and increasingly not the most important one. Luna: It's funny, we've had so many episodes about tariffs and trade wars, but the currency angle is often overlooked. This is a good reminder that exchange rates matter, but not in the way we think. Lucas: And that's why we do this show, right? To help people make sense of these complex dynamics. If you've found these conversations useful in your own work or decision-making, that's exactly why we keep at it. And if you ever want to support what we do, you can buy us a coffee at buy me a coffee dot com slash fexingo. It's a small gesture that helps keep the show ad-free and independent. Luna: Yeah, it really does make a difference. Even a few coffees a month helps cover the costs of research and production. But no pressure, obviously. We're just glad you're listening. Lucas: Right. So back to the trade picture: if we look at the last five days, emerging market stocks have been rallying, especially China and Brazil. That's partly because of the weaker dollar and partly because of hopes for more stimulus. But the trade data suggests those gains might not translate into a narrower US deficit anytime soon. Luna: So for investors, it's not enough to just bet on a weaker dollar. You have to look at the specific supply chains and demand patterns. Lucas: Exactly. And that's the takeaway. The dollar's slide is real, but it's not the magic bullet for trade rebalancing. The deficit is a structural feature of the US economy, driven by consumer demand and supply chain realities. Until that changes, we'll keep seeing these record numbers. Luna: And maybe that's okay. The question is whether it's sustainable. Can the US keep running these deficits without consequences? I think that's the bigger question for the next decade. Lucas: It's a good question, and one that policymakers are grappling with. But for now, the data is what it is. The dollar is down, the deficit is up, and the global trade machine keeps humming along. We'll be watching to see if any of these trends shift in the second half of the year.