What does a strong dollar mean for the US — and for emerg­ing mar­kets like SA?

Financial Mail - Investors Monthly - - Contents - RON DERBY

Ron Derby col­umn

The term “Cur­rency Wars” may have fallen into dis­use in a world where we are talk­ing of a strong dollar. The sim­ple rea­son be­ing that when the green­back was be­ing kept weak by the US Fed­eral Re­serve’s quan­ti­ta­tive eas­ing pro­gramme, the losers were al­most ev­ery other na­tion strug­gling against the man­u­fac­tur­ing mus­cle of China.

A weak dollar and the record low in­ter­est rates in the US sup­ported emerg­ing mar­ket (EM) cur­ren­cies such as our own and the Brazil­ian real, which made ex­ports less com­pet­i­tive. There was lit­tle that any cen­tral bank gover­nor could do to fend off the ef­fects.

Since the be­gin­ning of last year, how­ever, the dollar, en­cour­aged by signs of sus­tain­able US eco­nomic growth, has been on a steroid high. QE came to an end by Oc­to­ber and in­vestors have been wait­ing for the mo­ment when the Fed­eral Re­serve will hike rates, strength­en­ing the green­back even more.

EM cur­ren­cies have weak­ened over this pe­riod and the rand hasn’t been the worst hit; there have been much big­ger ca­su­al­ties of the sell-off. Lower oil prices have been the only sav­ing grace for economies that would oth­er­wise have been crip­pled by the in­fla­tion­ary im­pact, in par­tic­u­lar SA. Con­sumer in­fla­tion for Fe­bru­ary came in at 3,9%, a four-year low, and well within the Re­serve Bank’s tar­geted range.

Weaker cur­ren­cies and soft in­fla­tion­ary pres­sures should be a boon for EM economies that didn’t over­look their man­u­fac­tur­ing base dur­ing the re­sources su­per-cy­cle. Un­for­tu­nately, this doesn’t in­clude us. But there are no doubt cer­tain seg­ments of our man­u­fac­tur­ing sec­tor that are bask­ing in the glow of a weaker rand. And even though com­mod­ity prices are way off their highs in the main, the cur­rency has boosted earn­ings for min­ers that have suc­cess­fully man­aged costs.

A strong dollar has also helped the Euro­pean econ­omy. The euro has weak­ened, help­ing ex­port de­pen­dent economies such as Ger­many emerge from the slump caused by geopo­lit­i­cal ten­sions in the east stoked by Rus­sia’s dis­pute with Ukraine.

It has been a wel­come spur for the lag­gards in the race to get global growth back to lev­els seen be­fore the 2009 re­ces­sion, which is ba­si­cally ev­ery­one ex­cept for the US and China.

In this bout of EM cur­rency weak­ness, you aren’t hear­ing too many fi­nance min­is­ters be­moan­ing the strength of the dollar. In fact, Mario Draghi, the pres­i­dent of the Euro­pean Cen­tral Bank, has wel­comed the weak­ness of his cur­rency as it aids his search for some in­fla­tion­ary pres­sures.

But just how much more of a strong dollar can the US stom­ach, es­pe­cially as it in­creases the com­pet­i­tive­ness of Ger­man au­to­mo­biles at the ex­pense of Detroit? While the US econ­omy is largely seen as a do­mes­tic con­sump­tion play, its ex­ports up un­til Oc­to­ber last year were at record lev­els. Ever since that month, when QE came to an end, those fig­ures have been fall­ing off.

In the US fourth quar­ter, ex­ports rose more slowly than the pre­vi­ous quar­ter, re­flect­ing the strength­en­ing dollar. Im­ports in the pe­riod to end-De­cem­ber rose over 10%, in con­trast to a fall of 0,9% in the third quar­ter.

The longer the dollar ap­pre­ci­ates, the more likely the US will see im­ports ris­ing and boost­ing its trade part­ners. Though ex­ports con­trib­ute only 13% to US GDP, I can’t see the Fed­eral Re­serve — tasked with keep­ing an eye on un­em­ploy­ment and growth — be­ing in­ter­ested in rais­ing rates too soon, es­pe­cially with in­fla­tion nowhere near its 2% tar­get.

If any­thing, it may just be in the in­ter­ests of the Fed­eral Re­serve and Janet Yellen to do an about­turn much like the Bank of Eng­land gover­nor, Mark Car­ney, and de­lay a rate rise.

When the Bank of Eng­land’s eco­nomic tar­gets to in­crease in­ter­est rates in that coun­try were met early last year, Car­ney was nowhere near a po­si­tion to go ahead as the re­cov­ery was still ten­ta­tive and largely premised on a boom­ing Lon­don hous­ing mar­ket. Hik­ing rates would have been neg­a­tive, so in­stead he had to scrap the pol­icy of for­ward guid­ance.

The Fed may be forced to do the same. Last week Yellen and her team sig­nalled that in­ter­est rates would in­crease more slowly than pre­vi­ously fore­cast, a change in tune al­ready.

As long as in­fla­tion is in check, I can’t see the Fed mov­ing on rates. Never mind the de­nials, there’s a “Cur­rency War” to be fought.

Cer­tain seg­ments of our man­u­fac­tur­ing sec­tor… are bask­ing in the glow of a weaker rand

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