Column-Watch the dollar for de-globalisation :Mike Dolan By Reuters

By Mike Dolan

LONDON (Reuters) – The end of modern globalisation may owe more to the fortunes of the U.S. dollar than Kremlinologists, Sinologists or military analysts acknowledge.

A year from Russia’s invasion of Ukraine, fracturing geopolitics seems to be rolling back world trade links and financial interdependence at speed.

Political blocs are re-coagulating, economic nationalism is on the rise and international finance has to parse a level of cross-border risk not seen for over 30 years.

But global financial conditions – and the strength of the U.S. dollar as a proxy for that – may be playing a bigger part than the more dramatic political narrative lets on.

Both likely feed off each other of course. And neither is good for developing economies that are only beginning to attract back sizeable investment for the first time since the COVID-19 pandemic and Ukraine shocks.

In a presentation that caught many eyes last week, Bank for International Settlements’ Economic Adviser Hyun Song Shin showed how cross-border credit conditions and the way they’re reflected in cost of dollars had the most pernicious effect on globalisation over the past decade.

His slides spotlight how the relentless international trade growth that defines globalisation – measured by global export volumes as a share of world gross domestic product – peaked just before the banking crash of 2008 and has essentially stagnated ever since, despite recovering post-crash and post-pandemic troughs.

The simple link Hyun emphasised is between the boom in goods trade that drove pre-crash globalisation and how heavily it relied on supply chain finance and cross-border credit to expand. As that finance, measured broadly by cross-border banking lending relative to world GDP, has also never recovered the peaks of 2007 to 2008, he says the two are inextricably linked.

As most trade finance and international borrowing is conducted in dollars, demand for the U.S. currency and movements in the value of the greenback provide one of the best proxies for world credit conditions overall.

“This stagnation started well before the Covid shock,” Hyun wrote. “The evidence suggests that financial and real globalisation are two sides of the same coin.”

“A stronger dollar tends to go hand in hand with tighter global financial conditions and more subdued supply chain activity.”

Graphic 3: BIS chart on global value chains, https://fingfx.thomsonreuters.com/gfx/mkt/xmvjkngzrpr/Three.PNG

Graphic 4: BIS chart on global trade as share of GDP, https://fingfx.thomsonreuters.com/gfx/mkt/gkvlwlmrbpb/Five.PNG

Graphic 5: BIS chart on cross-border finance, https://fingfx.thomsonreuters.com/gfx/mkt/myvmoamdavr/Four.PNG

FRAGMENTATION

For markets looking at dollar trading and financial conditions day by day, it may be difficult to see such direct cause and effect.

But if you consider the Fed’s ‘broad’ trade-weighted is still almost 40% above 2008 lows – even after the 8% recoil from last year’s peak…