Question

The dollar can't seem to catch a break. The U.S. currency posted its fifth straight quarterly loss in the first three months of the year, puzzling investors who bet it would benefit from corporations repatriating cash in the wake of tax cuts signed into law late last year.

Many investors now believe uncertainty over U.S. policy, the risks of a global trade war and an acceleration in growth abroad mean more declines are in store for the dollar. The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, was down 2.6% in the first quarter, extending a 12-month loss which now stands at 7.3%. The euro, yen and some emerging-market currencies, meanwhile, are up in 2018.

A drop in the dollar's value over the past year has had broad implications, which would likely intensify if the U.S. currency's decline continues. A weaker dollar helps make U.S. goods more competitive abroad, boosting profits for multinational companies and potentially buoying their stock prices. It also lifts prices for commodities such as oil, copper and gold, which are denominated in the U.S. currency and become more affordable to foreign investors when the dollar falls.

If the dollar falls too rapidly, however, that could shake faith in the U.S. economy and complicate the Federal Reserve's plans to tighten monetary policy. An extended fall also could juice inflation and spark concerns that consumer prices will rise too quickly.

Most recently, investors have been spooked by a trade spat with China, after President Donald Trump threatened to levy tariffs on as much as $60 billion of imports from China, while Beijing announced retaliatory measures. The dollar edged lower on that news, although its losses were counterbalanced by steeper drops in other currencies.

The threat of a trade war "has certainly not had a constructive impact on the dollar," said Christian Lawrence, a senior market strategist at Rabobank. "The market interprets trade wars as potentially bad for the U.S."

Based on the article, please answer following questions:

2pt. What happened to the value of dollar in the past 12 month?

2pt. How does a weaker dollar affect US current account and US MNCs earnings?

2pt. How does a weaker dollar affect major commodities’ price level around the world?

2pt. How do a trade war and weaker dollar affect global investors’ confidence on the US economy, e.g. US inflation, competitiveness and other fundamentals?

Answer 1

Solution)
A) US$ has fallen to a value which is fifth straight quarterly loss in the first three months of the year also to decline during past 12 months. Many investors believe uncertainty over U.S. policy, the risks of a global trade war and an acceleration in growth abroad mean more declines are in store for the dollar.

B) I'll make it simple for you to understand.
In the world, there are two types of nations - Current account surplus nations and current account deficit nations.

What is current account?
It is the net revenue on exports minus payments for imports.
i.e. current account = Total Exports - Total imports.
Total exports is a country's income - It is what the country is selling to the world. Total imports is a country's expenditure. It is what the country is buying from the world. When current account balance value is positive, the country is exporting more i.e. earning more than it is spending. When this value is negative, the country is buying more than the amount it is earning.

• If there is a depreciation in the exchange rate. Then that particular country will experience a fall in the foreign price of its exports. It will appear more competitive and therefore there will be a rise in the quantity of exports.
• Assuming demand for exports is relatively elastic then a depreciation will lead to an increase in the value of exports and therefore improve the current account deficit.
• Similarly, a depreciation of the exchange rate will also lead to an increase in the cost of buying imports. This will lead to a fall in demand for imports and also help to reduce the current account deficit.
• Therefore, in theory, a depreciation in the exchange rate should improve the current account
• ?An appreciation should worsen the current account.

C) Assuming demand for exports is relatively elastic then a depreciation will lead to an increase in the value of exports and therefore improve the current account deficit.

D) With a trade war and US$ falling would make the investors lose confidence the US$ which consider to be a more safer than any currencies