You have recently been hired as an analyst for an international financial company. Your senior manager has asked you to look at an article: Bruno, V. and Shin, H.S. (2021), 'Dollars and exports: The effects of currency strength on international trade'. You can access a copy at

https://voxeu.org/article/effects-currency-strength-international-trade

Your senior manager has asked you to made a report on this article. The company is currently working on a project to better understand the effects of currency strength on international trade. Your senior manager has indicated that your report will be shared with the whole team and has asked you to cover the following questions in your report:

a.What is the main aim of the article?(5 marks)

b.How do the authors seek to achieve this aim?(5 marks)

c.How do the authors enhance previous research?(4 marks)

d.What is the basic point of the article?(8 marks)

e.Provide the team with a brief critical assessment of the article. Your firm relies quite heavily on US dollar short-term wholesale funding. The management team thinks the dollar will appreciate further. What would be your response? How would you advise the team to act in such a scenario?(8 marks)

f.Quality of report, tidiness of presentation, clarity of expression and correctness of referencing will be rewarded up to

Article

Dollars and exports: The effects of currency strength on international trade

• Hyun Song Shin
• Valentina Bruno

27 Jul 2021

The strength of the US dollar in currency markets has drawn the attention of researchers, policymakers, and businesses for decades. This column examines the effects of the dollar on international trade, with a particular focus on exports. A strong dollar dampens trade volumes through the financial channel, outweighing any improvement in trade competitiveness. Trade activity is strong when the dollar is weak, but global trade suffers when the dollar is strong.

We are accustomed to drawing an automatic link between exchange rates and exports through the trade competitiveness channel of exchange rates. This column highlights another important channel through which exchange rates affect global trade activity - the impact of a stronger dollar on tighter financial conditions, which in turn adversely affects credit availability for working capital of exporting firms.

Figure 1 is a striking illustration of how global trade activity fluctuates with the strength of the dollar. The chart plots the ratio of world goods exports to world GDP over the past 20 years or so. We see the strong growth in exports before the 2007-2009 Global Crisis, a deep decline as the crisis hit, and an equally sharp rebound in its aftermath. Thereafter, global trade was on a gentle declining trend relative to GDP until the Covid-19 pandemic struck last year. What is striking is the negative correlation between global trade activity and the strength of the dollar. Trade activity is strong when the dollar is weak, but global trade suffers when the dollar is strong. This pattern is remarkable in its consistency and has remained intact even during the pandemic.

Figure 1Global goods trade and the dollar