Fed look­ing at a very dif­fer­ent dol­lar than Wall Street

The Pak Banker - - COMPANIES/BOSS -

By many pop­u­lar mea­sures, the dol­lar has traded side­ways for the last six months. Then there's the Fed­eral Re­serve's mea­sure. The green­back is surg­ing, ac­cord­ing to an in­dex the Fed cre­ated to track the U.S. cur­rency ver­sus 26 of the coun­try's big­gest trad­ing part­ners. It's risen 1.3 per­cent be­yond a 12-year high reached in March, when the cen­tral bank fired the first of a se­ries of warn­ings that a stronger dol­lar may hurt growth and lower in­fla­tion. At a time when the Fed's tight­en­ing path has be­come one of the big­gest driv­ers in the $5.3 tril­lion-a-day for­eignex­change mar­ket, the dis­crep­ancy be­tween Wall Street's view -- largely based on the dol­lar's per­for­mance against the euro and the yen -- and that of pol­icy mak­ers may lead to a jolt for in­vestors ex­pect­ing re­cent ranges to per­sist.

The rapid trade-weighted ap­pre­ci­a­tion this quar­ter has come mostly against big ex­porters such as China and Mexico, and it un­der­cuts the Fed's goal of quicker in­fla­tion. It may trig­ger fur­ther jaw­bon­ing from of­fi­cials look­ing to cool the dol­lar's broad gains as the Fed be­gins rais­ing in­ter­est rates for the first time in al­most a decade. "The dol­lar still con­tin­ues to strengthen on a trade-weighted ba­sis and the Fed def­i­nitely takes that into the equa­tion,'' said Brad Bech­tel, a man­ag­ing di­rec­tor at Jef­feries Group LLC in New York. ``The risk is the Fed starts re­ally em­pha­siz­ing that, and the mar­ket would be caught off­side.'' The Fed's tradeweighted broad dol­lar in­dex mea­sures the green­back against the cur­ren­cies of 26 economies ac­cord­ing to the size of bi­lat­eral trade. China, Mexico and Canada make up 46 per­cent of the gauge.

Mean­while, most pri­vate-sec­tor dol­lar gauges track a bas­ket of the world's most liq­uid, widely used cur­ren­cies. In­ter­con­ti­nen­tal Ex­change Inc.' s U. S. Dol­lar In­dex, which serves as the bench­mark for var­i­ous fu­tures and op­tions in­stru­ments, has a 58 per­cent weight to the euro and 14 per­cent for the yen. It lacks rep­re­sen­ta­tion from any emerg­ing mar­kets, which ac­count for more than half of the U.S.'s to­tal trade flow.

The two in­dexes had moved along­side each other un­til a month ago. The Fed's broad dol­lar in­dex surged 3.4 per­cent this quar­ter to a 12-year high as China de­val­ued the yuan to sup­port a slow­ing econ­omy, while a re­newed com­modi­ties rout un­der­mined Canada's loonie and the Mex­i­can peso. The ICE dol­lar gauge dropped 0.7 per­cent dur­ing the same pe­riod.

``It's im­por­tant to be mind­ful of which dol­lar mea­sures mat­ter, es­pe­cially if you're look­ing at it through the Fed's eyes,'' Ellen Zent­ner, chief U.S. economist at Mor­gan Stan­ley, said on Bloomberg Ra­dio. One of the cri­te­ria for the Fed to raise rates is ``a lev­el­ing out of the tradeweighted dol­lar. At the time of the June meet­ing, they could check off that box. To­day, they can't.'' Dol­lar bulls as re­cently as March were buf­feted by un­ex­pected warn­ings from the cen­tral bank.

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