Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How the Strong Dollar Is Crushing Emerging Market Trade Finance
Transcript
- Lucas: So the US dollar index is sitting just below 119 this week — that's not quite its all-time high from 2022, but it's in the neighborhood. And if you look at what's happening in a few specific emerging markets right now, the pain is really concentrated. Luna: Yeah, the South Korea number jumps off the page. The EWY ETF — that's the Korea-focused one — dropped 19 percent in just five days. That's not a normal move. Lucas: It's not. And it's tied directly to dollar-denominated trade finance. Most cross-border trade — especially for intermediate goods like auto parts, electronics components — is still invoiced and financed in dollars. So when the dollar strengthens this sharply against the won, the rupee, the real, every dollar of trade credit becomes more expensive for the borrower. Luna: Even if the nominal interest rate on that credit hasn't changed, the effective cost in local currency has spiked. So a Korean auto parts supplier shipping to a US assembler might have negotiated a price in won a year ago, but the letter of credit is in dollars. Lucas: Exactly. And the margin on those parts is already thin — maybe 5 to 8 percent. A 19 percent currency swing in a week can wipe that out entirely. We're seeing reports out of Ulsan and Gwangju of small suppliers refusing new dollar-denominated orders until they can renegotiate terms. Luna: That's a huge deal for supply chains that have been optimized for just-in-time delivery. If a parts supplier says 'I can't take the currency risk,' the whole line stops. Lucas: And it's not just Korea. Look at India — the iShares India ETF is down only about 1.4 percent in the same period, but the rupee has been under steady pressure. Indian textile exporters, who compete on price with Bangladesh and Vietnam, are seeing their dollar-denominated receivables shrink when converted back to rupees. A lot of them are sitting on unpaid invoices that lost value while sitting in the pipeline. Luna: So what's the alternative? We've talked about yuan trade settlement before, but is it actually gaining traction now? Lucas: It is, quietly. Chinese banks have been pushing renminbi-denominated letters of credit for trade with Belt and Road countries and with resource exporters. In April, the People's Bank of China reported that 28 percent of China's cross-border trade was settled in yuan — up from about 20 percent two years ago. For a Brazilian soybean exporter, taking payment in yuan and then converting to reais might actually be less volatile than going through dollars right now. Luna: Because the yuan is pegged — loosely — to a basket. It's not floating freely like the won or the real. Lucas: Right. The yuan has barely moved this week — it's at 6.77 per dollar, almost flat. So for a trader trying to avoid currency volatility, the yuan offers a kind of stability that the dollar, ironically, does not when you're on the other side of the trade. Luna: But the dollar's strength isn't just hurting importers in emerging markets. It's also making US exports more expensive. The latest trade balance data shows the deficit widened to about 60 billion dollars in March — that's from 57.8 billion the month before. So exports are growing, but imports are growing faster. Lucas: And part of that is the dollar: American consumers and businesses find foreign goods relatively cheap, while foreign buyers find American goods expensive. The export number did rise — to about 3.5 trillion annualized in January — but it's being outstripped by imports at 4.4 trillion. That gap is financed by borrowing from abroad, which keeps the dollar strong in a self-reinforcing loop. Luna: Speaking of which — a couple of dollars a month is genuinely what keeps these shows going. If you've gotten something useful out of these conversations, buy me a coffee dot com slash fexingo helps keep us ad-free and focused on the numbers that matter. Lucas: Yeah, it's a small thing that makes a real difference. And we genuinely appreciate it. Luna: Alright, back to the dollar. So we've got this feedback loop — strong dollar widens the trade deficit, which requires more capital inflows, which keeps the dollar strong. When does it break? Lucas: That's the multi trillion dollar question. Historically, the dollar tends to peak when the Federal Reserve starts cutting rates aggressively, or when a global crisis forces a flight to safety that eventually reverses. Right now the Fed is on hold — rates haven't moved in months — but the market is pricing in a cut later this year. If that happens, the dollar could soften, which would relieve some of the pressure on those Korean and Indian exporters. Luna: But if the dollar stays strong for another quarter or two, we could see more companies switching to alternative settlement currencies or, in extreme cases, renegotiating entire supply contracts. That's a slow process — you can't just flip a switch. Lucas: No, and the infrastructure for non-dollar trade finance is still thin. SWIFT data shows that the dollar still accounts for about 48 percent of global trade finance — down from around 55 percent a decade ago, but still dominant. The euro is at 20 percent, the yuan at about 5 percent. So we're in a transition that could take years. Luna: But the pressure is building. Look at the broader emerging market ETFs: EEM is down nearly 8 percent in a week, VWO down 4 percent. That's not just currency — it's capital flowing back to the US. Lucas: Right, and that capital flight compounds the problem. When investors sell emerging market assets, they convert local currency into dollars, which strengthens the dollar further. So you get this triple hit: weaker local currency, more expensive dollar debt, and lower asset prices. For a CFO of a multinational operating in, say, Brazil or Indonesia, it's a nightmare to forecast cash flows right now. Luna: One thing I found interesting: the trade-weighted dollar index actually ticked down slightly this week — from 119.03 to 118.9. So maybe we're seeing a tiny bit of softening? Lucas: It's a fraction of a percent, and could just be noise. But the direction matters. If the dollar starts to ease, that would be a huge relief for the countries that are getting crushed. The question is whether it's the beginning of a trend or just a pause. Luna: And what about the yen? It's at 159 per dollar — actually slightly stronger than last week. That's still weak historically, but it's not falling anymore. Lucas: The yen has stabilized because the Bank of Japan has been quietly raising rates — very slowly — and the carry trade has unwound significantly. That's actually helped Japanese exporters stay competitive without the volatility that Korea is experiencing. The won has been much more volatile because of political uncertainty and a current account that's swung into deficit. Luna: So Korea is sort of the canary in the coal mine for dollar-dependent trade finance. If the won doesn't recover, we could see more trade shifting to alternative currencies or simply slowing down. Lucas: And that's the real risk — not just financial instability, but real economic activity grinding to a halt because companies can't get affordable trade credit. The WTO already downgraded its global trade growth forecast for 2026 to 2.5 percent from 3.2 percent, partly because of currency volatility. Luna: That's a big deal for a world that's already dealing with supply chain fragmentation and tariff uncertainty. Lucas: Yeah, and it's a reminder that trade finance is the grease that keeps the wheels turning. When that grease gets too expensive, the whole system slows down. We'll be watching the won, the real, and the rupee closely in the coming weeks. Luna: And the dollar index, obviously. Lucas: Always the dollar index. Thanks, Luna.