Weekly Updates
Weekly Updates
- The broad-based drop in the value of the US dollar this year has been rapid. Traditionally, a weaker currency is associated with higher inflation. Modern trading behavior has weakened that narrative, however. The dollar’s decline is likely to be less relevant to the US affordability crisis than were tariffs.
- Over the past 50 years, the pattern of trade has shifted. Today, over half of global trade takes place inside multinational companies. Currency moves matter less when goods are shifting between subsidiaries, and currency moves affect internal costs as well as revenues.
- Companies selling finished products will have invested in building their market share. This encourages a “pricing to market” strategy—prices are set according to local market conditions, and are not likely to change with every convulsion of the foreign exchange market. In the case of the US, nearly every single import contract is written in dollar terms, and the agreed price will last for the length of the contract even if the dollar collapses.
- The result is that while dollar weakness might have some effect on US inflation (mainly via commodity prices), the impact is less severe than with tariffs. Any impact is also likely to be gradual, as existing contracts are honored and companies take time to adjust pricing.
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