By Avi Krawitz, Dec. 1, 2016.
A stronger U.S. dollar may curb diamond demand in emerging markets, but ultimately it should improve consumer spending in the largest diamond jewelry market.
The recent strengthening of the U.S. dollar will impact the diamond trade in different ways, depending where along the pipeline one sits. The greenback surged to a 14-year high against a basket of currencies in November, after Donald Trump’s surprise win in the U.S. presidential elections.
Investors are buying into the dollar on expectations the Trump administration will cut taxes, loosen regulations and raise infrastructure spending when he takes office in January. There has also been some dollar demand as a hedge against uncertainties surrounding the Trump presidency, and in anticipation the Federal Reserve will raise interest rates in December.
While the dollar gained strength, currencies in key diamond centers weakened, affecting trading sentiment. China’s yuan depreciated 2 percent against the dollar during the month and has now lost 6.2 percent since the beginning of the year. Meanwhile, the Indian rupee fell 3 percent following the government’s drastic measures to eliminate INR 500 and INR 1,000 notes, as it battles against money laundering and the high volume of fake notes in circulation.
Chinese Tourist Spending
Already, Chinese buyers have grown cautious at a time when they should be stocking up for the Chinese New Year season that begins on January 28. The yuan’s depreciation has made their diamond purchases more expensive since they’re paying the trade in dollars to import and manufacture jewelry, and typically sell in China in the local currency.
Currency fluctuations also affect Chinese consumer spending, especially since Chinese tourism has become such an important factor. A weaker yuan will likely influence some restraint among Chinese tourist spending overseas, while encouraging consumer demand inside China.
The dynamic in India is somewhat different given its position as the major diamond manufacturing center, while it also boasts a sizeable jewelry retail market. Jewelry sales are expected to slump in the next six to nine months due to the lack of liquidity following the government’s currency ban, or so-called “demonetization” move.
The anticipated drop in local jewelry sales has already impacted demand for smaller and lower quality diamonds – both in the rough and polished markets. However, regardless of the volume of cash in circulation, the weakening rupee will have a deeper impact on the diamond market.
With local bank credit provided in rupee terms, already expensive rough becomes that much more expensive for leveraged Indian buyers when accounting for the foreign exchange translation alone. It puts additional pressure on the many small-to-medium sized manufacturers – those most affected by the demonetization policy – who supply the local market, buying rough in dollars and selling polished in rupee.
Larger manufacturers with access to dollar financing, and who are supplying the export market, stand to gain. Indeed, the weak rupee may well increase India’s competitive edge in manufacturing as labor costs in dollar terms will be reduced. As long as they’re financed in dollars, and buying and selling their diamonds in dollars, their rupee costs have come down.
They may also benefit from a rise in demand from the U.S., the largest market for diamond jewelry. While a stronger dollar may reduce demand outside America, it makes imports to the U.S. less expensive. That should translate to lower priced goods, and in turn help raise consumers’ disposable income and spending.
A stronger dollar should therefore empower U.S. diamond importers and their suppliers in time for the Christmas holiday. And therefore, it should encourage the diamond trade that works primarily with the greenback. At least for the holiday season, the dollar’s strength should have a positive impact for a large portion of the diamond industry.