Great Graphic: How a Strong Dollar Weighs on Net Exports

Investors appreciate that a strong dollar can
impact US growth through the net export component of GDP.  
The
dollar’s appreciation can push up the price of exports and lower the cost of imports.  The St.
Louis Fed
took a look at how the strong
dollar
from 2014 to the beginning of 2016 impacted the net export
function of GDP.  

It is clear that a strong dollar in this
period was associated with a drag on
growth from net exports.
  Of the two-year period, the St. Louis Fed
reviewed, trade contributed positively to growth in only one quarter.
  

The review found that the impact the strongest
in the first half of the appreciation period reviewed.  In the Q4 14 and
Q1 15, net export took 1.14% and 1.65% respectively from GDP growth. 

As the dollar advance continued, the drag
on net exports diminished.  In Q4 15, net exports took 0.5% off GDP even
though the dollar rose another 10%.  

The St. Louis Fed took another step. 
This Great
Graphic
that they produced drills into the net export functions components,
exports, and imports, to better understand how the rising dollar
impact trade.  The conclusion is that the dollar’s appreciation impacts
imports more than exports.  The report found that the cumulative impact of
imports was to shave GDP by 4.6%, while the cumulative impact of exports was actually slightly positive (0.85%).  

The broad trade-weighted
dollar index, tracked by the Federal Reserve, rose in seven of the last eight
months of 2016.
  If the relationships do not change, the dollar’s
appreciation will likely weigh on GDP more through an increase in imports than the decline
in exports. 

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