Dollar picks up steam against developing economy currencies

The other development on the external front is the magnitude of the rise in the dollar. Up until recently, the dollar's rise had been more prominent against major advanced trading partners. Between the start of 2014 and the end of the second quarter of this year, the dollar had risen 19% against major trading partners (Euro Area, Canada, Japan, United Kingdom, Switzerland, Australia), but rose less than 10% against other trading partners in the developing world (the biggest being Mexico and China). This changed in August when the dollar lost ground against advanced currencies, but rose appreciably against those in developing economies. As a result, the trade-weighted dollar is poised to end the third quarter up almost 5% since the end of the second quarter. 

The continued rise in the dollar will accentuate the difficult environment facing U.S. exporters. However, the more recent appreciation against developing economies also means a larger disinflationary impulse going forward. Due to the fact that America imports more from developing economies than it exports, there is a greater negative impact on consumer prices from an appreciation against developing market currencies relative to those in advanced economies. The good news is that while this is likely to imply greater import growth, this is at least partially offset by greater gains in consumer purchasing power. 

"We expect net exports to subtract 0.6 percentage points from economic growth in both 2015 and 2016. For 2016, this impact is 0.3 percentage points higher than previously anticipated. As global growth improves and the dollar gives up some of its gains, the drag from net exports is expected to narrow to 0.4 percentage points in 2017", says TD Economics.