USD: the dollar's rise is negative for global economic growth, here's why

Krishen Rangasamy, an analyst at Canada's National Bank Financial, suggests that it is not clear whether the global economic slowdown is supporting the dollar, or whether it is the rise of the dollar that is slowing growth:

"The direction of causality is not clear. As we have seen recently, fears of the global economy weakening could increase risk aversion in financial markets and push the dollar higher as flows seek safe havens.

Conversely, a stronger dollar could harm the global economy by making it more difficult to access credit in dollars.

In addition, a strong dollar has the potential to reduce trade volumes, with negative repercussions on the global economy.

According to the Bank for International Settlements, about 65% of world trade is financed by companies themselves and 35% by the banking system.

However, approximately 80% of bank financing is denominated in US dollars. Simply put, a significant portion of world trade is financed by the US dollar banking system.

Thus, if the cost of borrowing (for example, the US dollar exchange rate) increases, it will slow down US dollar lending and borrowing, which will affect the volume of trade and thus global GDP growth. Regardless of the direction of causality, there is a clear correlation between the dollar index and world trade volumes.

The two tend to move in opposite directions. World trade is strongly negatively correlated with the dollar index.

The recent appreciation of the dollar is therefore not a positive development for the world economy."