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