The Upside of a Double Dip

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Lee Jae Won / Reuters

A slew of economic indicators out this week has ratcheted up fears of a double dip recession. Many think Friday’s jobs’ report could be the death knell of the U.S. recovery. But there’s a silver lining to the disappointing stats on housing, jobs, and manufacturing: No matter how bad it gets, the dollar will probably stay weak. And that’s good news for U.S. businesses, since so many rely on a weaker dollar to make their wares cheaper in booming emerging markets, their biggest avenues for growth.

Last year troubles in the eurozone were a boon for the U.S. dollar, which typically serves as the depot for the world’s cash when the global economy gets in a bind. But after Wednesday’s ADP report on private-sector jobs and Institute for Supply Management’s manufacturing report, traders didn’t opt for their traditional dollar haven. Instead many flooded into the higher-yielding Swiss franc and the Japanese yen. What’s more, during the month of May, emerging market debt, which usually empties out during times of trouble, didn’t flinch at more bad news coming out of Europe. JPMorgan’s emerging market debt index rose 1.4% last month, compared to its dramatic fall following last May’s upheaval over the eurozone and IMF’s €110 billion package for Greece.

The shift over to emerging market debt isn’t going away. Total assets in funds dedicated to emerging market debt have more than doubled since end-2009. Why? Rock-bottom interest rates in the U.S. have a lot of institutional investors searching for higher-yielding investments in emerging markets. Emerging market inflation is a concern, since that can eat into investor returns. But as emerging market currencies rise in value along with their economies, U.S.-based fund managers get an extra kick from being able to report their returns in dollar terms.

Some think the shift in economic power from Western powerhouses to emerging markets is making borrowing costs abroad too cheap, given the risks involved in parking your cash in politically volatile places. But the fact is that many emerging markets have better balance sheets — and certainly a lot less commotion — than a lot of countries in Europe. U.S. corporations will ride the benefits of that dynamic for as long as they can. And their bigger profits may actually benefit the average American for a while, since those translate into rising returns on their 401ks. But it’s when those profitable companies decide to actually start hiring that will make all the difference.