The market move most people noticed last year was the the collapse in crude oil prices, which tumbled more than 40%.
But the decline in crude is merely the tail of the dog. And that dog is the US dollar.
No market mutt, the greenback is in the midst of a period of strength not seen since well before the financial crisis. Its ascent is fundamentally reshaping global financial markets, creating pretty clear winners and losers along the way. Here’s how we see a few of them.
Oil exporters: Obvious losers
As we mentioned before, the decline in oil prices is tightly linked to the surge of the US currency. That’s because crude oil is priced in dollars, which means the stronger the dollar gets, the more oil it buys. And that means lower prices for oil. There are other elements at play, of course, such as surging US production and slowing global economic growth in energy-hungry emerging markets such as China.
That means less revenue from selling oil. But not all oil exporters are equal. Some are far more dependent on oil exports to balance their budgets. Gulf oil states such as Saudi Arabia and Kuwait—which have socked away stockpiles of savings—appear to be in far better shape than countries like Venezuela, Angola, and Iran, which require far higher oil prices to balance their budgets.
Asian Exporters: Winners
Let’s be clear, the US dollar is strengthening because the US economy is the world’s bright spot. That means the Federal Reserve will likely raise interest rates in 2015. All else equal, that’s a good thing for the dollar. And it’s a double win for the export sectors of large Asian exporters such as Japan, China, Taiwan, and Korea. A stronger dollar versus their currencies means their exports are cheaper for American consumers. And the strength of the US economy means people are looking to buy.
Now, there are some crosscurrents here. For example, fewer Japanese manufacturing companies do all their manufacturing at home nowadays, which should mute the impact of the weak dollar. And China has basically pegged its currency to the the dollar, which means that its currency has actually been strengthening versus regional rivals. That leaves Korea and Taiwan as some of the most obvious beneficiaries of the dollar surge.
Since the Federal Reserve embarked on its path of unconventional monetary policy during the wake of the Great Recession, a die-hard group of inflation fear mongers have been warning that the ultimate result would be a sharp weakening of the US dollar and a surge in prices. They have been totally wrong. And the strength of the US dollar means they’re going to get much more wrong.
A strong dollar decreases prices of imported goods in the US, putting downward pressure on prices. But it’s not just in the US: Globally, prices have been trending downward—something that the dollar, via the energy markets, will exacerbate.
This isn’t necessarily a good thing. For countries like Japan that are struggling to shake off deflation, and in the Eurozone—which is struggling not to become the next Japan—this will make their challenge all the more difficult, enough so that Morgan Stanley’s Joachim Fels predicts that “the battle against lowflation“ will be the big global macro theme of 2015.
The US economy: Winner
The US economy is a heavily tilted towards consumption, and the strong dollar gives a purchasing-power boost to American wallets. (This impact already has been felt thanks to the decline in gasoline prices.)
The lower prices there free up cash from household budgets to be spent elsewhere on other items, much of which are foreign imports and therefore falling in dollar terms. Moreover, while the strength of the dollar will crimp foreign profits for some companies, it won’t mean much to the US economy as a whole, given that exports account for just 13% of GDP.
Emerging market corporate borrowers: Losers
Emerging market companies have borrowed a lot of money by selling debt in the global bond markets over the last few years. And much of that is dollar-denominated, which means it has to be paid back in American dollars.
This can be tougher for companies to do when the dollar is getting stronger, as sales of their goods result in smaller piles of the American currency. And that can raise the specter of default. So far, most of the concern about this phenomenon has been centered around energy-centric companies in countries such as Venezuela and Russia. But it’s definitely something to watch for elsewhere.