The dollar's strength in 2020 will likely 'amplify' the negative impact of the coronavirus on global trade, the IMF warns
- The IMF said in a report Monday that the US dollar's appreciation against many emerging markets in recent months may not necessarily increase demand for those countries' exports.
- Many countries exports are priced in US dollars, including oil.
- The IMF said: "There is growing evidence that most of global trade is invoiced in a few currencies, most notably the US dollar."
- "The global strengthening of the US dollars ... is likely to amplify the short-term fall in global trade and economic activity," the IMF said.
The dollar's recent strength role may actually prevent emerging markets from experiencing higher demand for their exports as many of their them are priced in dollars, the IMF said Monday.
In a note called "Dominant Currencies and External Judgement" the IMF noted that the dollar's dominance as a global currency can impact the way global trade works, and could make a global economic recovery from the coronavirus pandemic even more difficult.
"The prevalence of dominant currencies like the US dollar in firms' pricing decisions alters how trade flows respond to exchange rates," the report noted.
"The dominance of the US dollar in trade and finance is likely to amplify the impact of the COVID crisis," the report's authors said.
Normally when the dollar depreciates against other currencies, it makes it cheaper for the US to buy goods dominated in other currencies that are facing the weakness.
The dollar has appreciated against many emerging market currencies during the pandemic, raising hopes that this will make the exports of the countries whose currencies have depreciated more attractive.
For example, the US dollar has appreciated almost 5% against the Indian Rupee since the start of the year. One dollar is currently worth 74.75 INR.
But the dollar is also the world's most commonly used currency, and the world's top reserve currency, meaning that any depreciation is unlikely to boost demand for emerging market exports, the IMF said.
The introduction of euro "initially reduced" the dominance of the US dollar, but the greenback has undoubtedly remained the world's most traded currency, it added.
Dominant Currency Pricing
The IMF noted: "There is growing evidence that most of global trade is invoiced in a few currencies, most notably the US dollar—a feature dubbed Dominant Currency Pricing or Dominant Currency Paradigm."
"The share of US dollar trade invoicing across countries far exceeds their share of trade with the US. This is especially true in [emerging markets and developed economies] and, given their growing role in the global economy, increasingly relevant for the international monetary system," the IMF said.
This means if export prices are set in US dollars or euros, a country's depreciation doesn't necessarily make the goods and services cheaper for foreign buyers, "creating little incentive to increase demand," the IMF explained.
The prevalence of dominant currency pricing means the boost to the domestic economy facing the depreciation can be short-lived.
One key example of this is petrodollars, where an oil exporting country is paid US dollars by the buyers of its oil.
The petrodollar has been in place since the mid-1970s when prices rose to record levels. It was invented to help keep oil prices stable. It initially just included countries from the Middle East, but has been extended to members of the Organization of the Petroleum Exporting Countries and other countries over the past few years.
An appreciation of the dollar against other countries' currencies also means that the depreciating countries' currencies will find it harder to buy US imports, reducing purchasing power.
The IMF concluded: "The global strengthening of the US dollar—which mainly reflects a flight to safe haven assets—is likely to amplify the short-term fall in global trade and economic activity, as both higher domestic prices of traded goods and services and negative balance sheet effects on importing firms, lead to lower import demand among countries other than the United States."