Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / How the Strong Dollar Is Reshaping Global Trade Finance
Transcript
- Lucas: The US dollar has been on an absolute tear for the last four years — up more than 20 percent against a basket of major currencies since early 2021. And yet, something strange happened in May: the US trade deficit widened to nearly 78 billion dollars, the biggest monthly gap in over two years. Luna: That does seem backward. Conventional economics says a stronger dollar should make imports cheaper and boost the deficit, but we've had that strong dollar for a while. Why is the deficit still surprising people? Lucas: Right, the textbook logic is: dollar goes up, imports get cheaper, exports get more expensive, deficit widens. And that's broadly what we're seeing. But the magnitude — a 78 billion dollar monthly deficit — is still catching attention because the dollar has actually softened a bit recently. The trade-weighted index dipped from 121.15 to 120.7 in just the past week. Yet the deficit is still expanding. Luna: So the deficit is sticky. What's driving that — is it volumes, or is it more about pricing and supply chains? Lucas: It's a mix. On the import side, American companies are still restocking after years of lean inventories, and they're buying more capital goods and industrial supplies. On the export side, US goods aren't getting much cheaper for foreign buyers because a lot of them are priced in dollars anyway — think aircraft, semiconductors, agricultural commodities. So the currency move doesn't translate instantly into trade flows. Luna: That's a good point — dollar pricing creates a kind of inertia. But I imagine this is also reshaping how companies actually finance all this cross-border trade. Letters of credit, payment terms, hedging — that stuff must be getting more complicated. Lucas: Absolutely. And that's the angle I want to drill into today. Because the strong dollar isn't just a macro headline — it's forcing treasurers at multinationals to rethink how they move money across borders. One trend that's accelerating: the shift away from the dollar in trade settlement, especially in Asia. Luna: You mean the yuan? We've done a couple of episodes on that already. How much has really changed on the ground? Lucas: It's incremental but real. Back in 2023, about 48 percent of China's cross-border trade was settled in yuan. By early 2026, that number is pushing past 55 percent. That's a meaningful shift when you consider that a decade ago it was under 20 percent. And it's not just China — Malaysia, Indonesia, Thailand are all signing bilateral swap agreements to settle trade in local currencies. Luna: So the strong dollar is actually accelerating dedollarization in trade finance, because companies want to avoid the currency mismatch. If your revenues are in rupiah or baht but your trade credit is in dollars, you're getting squeezed. Lucas: Exactly. And that squeeze shows up in the cost of hedging. A year ago, a three-month dollar-rupiah forward contract cost about 3 percent annualized. Today it's closer to 5 percent. That eats into margins on every shipment. So companies are looking for alternatives. Luna: What does that look like operationally? Are banks issuing more letters of credit in non-dollar currencies? Lucas: Yes, and there's a parallel push toward digitizing the whole letter of credit process. Historically, a letter of credit involves a ton of paper — bills of lading, invoices, insurance certificates — all moving by courier between banks. That takes days, sometimes weeks. Now you've got platforms like Contour and we.trade using blockchain to digitize those documents, and they're seeing a surge in usage, especially for yuan-denominated LCs. Luna: And that faster settlement reduces currency risk too, because the time between invoice and payment is shorter. So digital trade finance and dedollarization are kind of feeding each other. Lucas: They are. And it's not just Asia. In Latin America, Brazil and Argentina have been pushing for more trade in local currencies. Brazil's trade with China is now over 30 percent settled in reais or yuan, up from basically zero a few years ago. That's a huge shift for something as conservative as trade finance. Luna: But does the Fed's stance matter here? We just had a rate decision — the Fed held steady again, with rates still above 5 percent. That keeps the dollar relatively strong, even if it's off the highs. Lucas: It matters a lot. Higher for longer means dollar funding costs stay elevated. That puts pressure on emerging market banks that rely on dollar credit lines to finance trade. When those lines get expensive, they pass it on to importers and exporters. And that's when you see companies start to look for non-dollar financing — like yuan-denominated trade credit from Chinese banks, which are offering more competitive rates. Luna: So actually, the Fed's policy is indirectly boosting the use of alternative currencies in trade. That's a pretty counterintuitive consequence. Lucas: It is. And people often forget that trade finance is the plumbing of global commerce. When that plumbing starts to change — when more invoices are denominated in yuan, when letters of credit go digital — it has ripple effects for years. The dollar is still dominant, but the foundation is shifting. Luna: Given this is your area — if a listener is running a company that imports from Asia or exports to emerging markets, what's the one practical thing they should be looking at right now? Lucas: I'd say: audit your currency exposure per trade lane. If you're importing from Indonesia, look at whether your supplier would accept settlement in rupiah via a local currency swap. The infrastructure is there now in a way it wasn't three years ago. And the savings on hedging costs alone could be significant. Also, talk to your bank about digital documentary credits — they can cut settlement time by half. Luna: And if today was actually useful to you, the way these stay ad-free is listener support. You can find us at buy me a coffee dot com slash fexingo. It's a small thing that keeps this show independent. Lucas: Yeah, we really appreciate that. And if you've been following this series on global trade, you know we try to give you one concrete, actionable idea every episode. So if that's valuable, the coffee link is there. Luna: Alright, back to it. So Lucas, you mentioned the shift in Asia and Latin America — what about Africa? Are we seeing similar moves there? Lucas: We are, though at a smaller scale. Kenya and Uganda are starting to settle oil imports in local currency with each other, cutting out the dollar. And the African Continental Free Trade Area is pushing for a pan-African payment system that settles in local currencies. It's early, but the direction is clear. Luna: So the strong dollar is really acting as a catalyst for a multipolar trade finance system. The US deficit might be widening, but the dollar's role is being subtly chipped away. Lucas: Exactly. And that's not necessarily a bad thing for the US. A more diversified system could be more resilient. But in the short term, it means the trade deficit is likely to stay wide, because even as the dollar eases, the structural shifts in trade finance take years to unwind. Luna: Let's zoom out to the broader market context. The S&P 500 is near 7,500, the Dow is above 52,000. Yet the Russell 2000 is down almost 2 percent this week. What does that tell us about how investors are reading these trade dynamics? Lucas: I think it tells us that the strong dollar is still a headwind for small-cap companies that export more. Large multinationals can hedge, they have treasury teams, they can shift production. Small companies get squeezed. And that shows up in the Russell's underperformance. It's not the only factor, but it's part of the story. Luna: And with the China ETF, FXI, up nearly 5 percent this week, there's clearly some optimism about Chinese stimulus or trade deals. But the yuan is still around 6.79 per dollar — it hasn't strengthened much. Lucas: Right, the yuan is being managed. China wants to support exports, so they won't let it appreciate too much. But they also want to promote yuan internationalization. Those two goals are in tension. If they push too hard on settlement, they risk capital outflows. So they're walking a tightrope. Luna: One more thing — the trade deficit data also showed imports rising faster than exports. Imports of goods and services are now at an annualized rate of 4.3 trillion dollars. That's a lot of stuff coming in. Are we seeing any sector-specific shifts? Lucas: Yes, capital goods imports are up sharply — machinery, computers, industrial equipment. That suggests US businesses are still investing in capacity, even with high rates. And consumer goods imports are also elevated, which is interesting given that consumer sentiment has been mixed. So the trade deficit is partly a sign of economic resilience, not just a weakness. Luna: So to wrap it up: the strong dollar is reshaping trade finance in ways that are subtle but important. Companies are moving to alternative currencies, digitizing letters of credit, and rethinking hedging. And the trade deficit, while large, reflects a complex reality — not just currency effects. Lucas: Exactly. And the key takeaway I'd leave listeners with is: don't assume the deficit will shrink just because the dollar softens. The plumbing is changing, and that has its own momentum. Watch the yuan settlement numbers and the digital LC platforms — those will tell you where trade finance is heading.