The almighty dol­lar

The Pak Banker - - OPINION - Scott Lanman

THE almighty dol­lar is might­ier than ever since the global fi­nan­cial cri­sis. As the U.S. econ­omy chugs along and most oth­ers strug­gle, in­vestors are still flock­ing to it, en­abling the U.S. to bor­row lots of money at low in­ter­est rates. Amer­i­can con­sumers can feast on it, buy­ing im­ported good­ies for less. U.S. politi­cians tout it as ev­i­dence of the econ­omy's eter­nal dy­namism. Other coun­tries are driv­ing their cur­ren­cies down, mak­ing their goods more com­pet­i­tive on the world mar­ket. Not the U.S. It stands out as the one na­tion that prefers its money su­per­power-strong.

That's a mixed bless­ing. The high dol­lar hurts some Amer­i­can multi­na­tional com­pa­nies' earn­ings by re­duc­ing the value of sales abroad. It pushes down in­fla­tion that's al­ready con­sid­ered too low. For the rest of the world, dan­ger lurks in surg­ing dol­lar-de­nom­i­nated debt sold in emerg­ing mar­kets like Brazil and In­dia; the stronger dol­lar makes those bonds harder to re­pay.

The U.S. Dol­lar In­dex, which tracks the green­back against six ma­jor cur­ren­cies, surged 23 per­cent from the start of 2014 to the end of 2015. The move to­ward higher in­ter­est rates in the U.S. - while they re­main near zero or even neg­a­tive in the rest of the world - is mak­ing the dol­lar more at­trac­tive, push­ing its value up.

Big-name Amer­i­can com­pa­nies across an ar­ray of in­dus­tries, in­clud­ing MasterCard, Tiffany and 21st Cen­tury Fox, blamed the dol­lar's strength for crimp­ing prof­its in 2015. By one es­ti­mate, U.S. com­pa­nies have been get­ting hit the hard­est in at least four years. A stronger dol­lar means a weaker yen, hurt­ing U.S. au­tomak­ers by help­ing Ja­panese com­peti­tors like Toy­ota, which make more money on each car sold in dol­lars. A slump­ing euro means good things for com­pa­nies in Europe that sell in the U.S. Yet for emerg­ing­mar­ket economies from Brazil to Malaysia, a rout in their cur­ren­cies has lured cap­i­tal away and lim­ited growth.

There's also a slow­down in the high-end home mar­ket in places like Mi­ami. Mean­while, China roiled global mar­kets with a sur­prise de­val­u­a­tion of the yuan in Au­gust and a poorly com­mu­ni­cated shift to­ward peg­ging the cur­rency against a bas­ket of coun­ter­parts in­stead of mainly the dol­lar.

The U.S. econ­omy be­came the world's largest in the 1870s, yet the Bri­tish pound re­mained the dom­i­nant cur­rency. That changed start­ing with the cre­ation of the Fed­eral Re­serve in 1913. World War I helped too by forc­ing other na­tions to sus­pend con­vert­ibil­ity of their money to gold.

The Bret­ton Woods agree­ment made the dol­lar's pre­em­i­nence of­fi­cial in 1945 as U.S. money be­came the stan­dard used to fix ex­change rates. As the post­war U.S. econ­omy strength­ened, so did the dol­lar. In 1995, Trea­sury Sec­re­tary Robert Rubin as­serted that a strong dol­lar is in the U.S. na­tional in­ter­est, a mantra re­peated by each of his suc­ces­sors (though not al­ways with con­vic­tion). Prac­ti­cal­i­ties di­verged­from pol­icy in 1985, when the Plaza Ac­cord reached by the U.S. and the other four rich­est economies pushed down the dol­lar's value for a while to slow Ja­panese ex­ports.

It didn't last. The dol­lar re­mains the dom­i­nant re­serve cur­rency, used by coun­tries to pay in­ter­na­tional debts. Even the global fi­nan­cial cri­sis of 2008 strength­ened the dol­lar, as in­vestors sought safety in U.S. govern­ment debt.The Trea­sury Depart­ment, now un­der Sec­re­tary Ja­cob J. Lew, is un­wa­ver­ing in its al­le­giance to the strong dol­lar. Else­where there are other opin­ions.

A Deutsche Bank strate­gist says in­ter­ven­tion might even­tu­ally be needed to sup­port China's yuan and weaken the dol­lar. Fed­eral Re­serve Chair Janet Yellen said in Fe­bru­ary that the dol­lar's strength has harmed U.S. man­u­fac­tur­ing and ex­ports, though she sig­naled that it won't stop the cen­tral bank from rais­ing in­ter­est rates. As the Euro­pean Cen­tral Bank and Ja­pan con­tinue to buy bonds to stim­u­late their flag­ging economies, in­vestors are likely to pour more money into the U.S. The re­sult­ing rise of the dol­lar, warned for­mer Trea­sury Sec­re­tary Lawrence Sum­mers in 2015, could slow the econ­omy sig­nif­i­cantly. So Amer­i­cans should hold off on the cham­pagne, even if the strong dol­lar makes it a bar­gain.

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