Treasury Secretary Steven Mnuchin says that a softer dollar will juice US economic growth. Speaking at the World Economic Forum in Davos, Switzerland, he advises that “obviously a weaker dollar is good for us as it relates to trade and opportunities.” Does that mean that tracking the dollar’s value in foreign exchange markets offers insight into projecting US GDP in the near term? Alas, no. A preliminary look at the numbers suggests the relationship between a broad measure of the US dollar and GDP growth is mostly noise.
A decline in the dollar vs. foreign currencies will provide a tailwind for certain industries. In particular, US companies that rely on exports will benefit since their products and services enjoy a greater degree of competitive pricing in offshore markets after translating for a slide in the greenback. But from a top-down perspective you’ll hurt your eyes looking for a reliable pattern through the decades for one-year changes in GDP vs. a broad measure of the Trade Weighted U.S. Dollar Index.
True, US growth has accelerated in recent history when the dollar has been relatively weak and vice versa. Using the last decade or so as a guide, the relationship seems to offer some traction for using the greenback as a guide for anticipating broad economic activity. But it’s still a stretch. In any case, a single ten-year run is hardly the basis for a robust test, especially given the unusual state of economic affairs generally since 2007.
Meantime, looking at the numbers since the 1970s presents an open-and-shut case of noise, as the scatterplot below reminds. The correlation for one-year changes is roughly zero over the past four decades-plus. Ditto for the R-squared reading. The numbers, by the way, don’t change much if we limit the analysis to the last ten years.
The dollar isn’t irrelevant to US economic activity. But as a reliable gauge of the broad macro trend there’s a case for skepticism. Consider that a year ago there was concern that a strengthening greenback would create stronger headwinds for economic growth. A year on, GDP growth has accelerated and the dollar’s weakened.
The good news is that there are productive methodologies for estimating near-term economic growth. Focusing on forex data isn’t one of them.