Strong buck com­pli­cates the Fed’s rate pol­icy

Los Angeles Times - - BUSINESS - By Tom Petruno

The in­ter­est rate on an Amer­i­can home mort­gage later this year could de­pend a lot on how many eu­ros, yen, pe­sos and ru­pees a dollar will fetch.

The dollar’s steep as­cent against many of the world’s cur­ren­cies since last sum­mer could help de­lay the first Fed­eral Re­serve rate hike since 2006. In turn, that could af­fect mort­gage and other long-term rates.

His­tor­i­cally, the Fed of­fi­cially hasn’t paid much at­ten­tion to the dollar’s swings, hon­or­ing a sep­a­ra­tion of pow­ers that goes back to the cen­tral bank’s cre­ation: The Fed is re­spon­si­ble for mon­e­tary pol­icy, while de­ci­sions about the dollar are the U.S. Trea­sury Depart­ment’s domain.

But un­der Chair­woman Janet L. Yellen, the Fed has made clear that the dollar is on pol­i­cy­mak­ers’ minds as they con­tem­plate what to do with rates.

A closely watched in­dex of the dollar’s value against six other ma­jor cur­ren­cies has shot up 21% since last June to its high­est level

since 2003. That is mak­ing U.S.-pro­duced goods more ex­pen­sive abroad and turn­ing over­seas earn­ings for many Amer­i­can multi­na­tional com­pa­nies into fewer dol­lars.

The min­utes of the Fed’s late-Jan­uary meet­ing said of­fi­cials ex­pected the strong dollar to be “a per­sis­tent source of re­straint on U.S. net ex­ports.” The min­utes also said that “a few par­tic­i­pants pointed to the risk that the dollar could ap­pre­ci­ate fur­ther.”

Yellen, in a news con­fer­ence af­ter the Fed’s mid-March meet­ing, said the cen­tral bank was “tak­ing ac­count of in­ter­na­tional de­vel­op­ments” in its de­lib­er­a­tions, an ap­par­ent ref­er­ence to the dollar’s surge.

A few months ago, many econ­o­mists ex­pected the Fed to begin rais­ing its bench­mark short-term rate in June from near-zero lev­els. Now most an­a­lysts doubt that the Fed will or­der its first in­crease be­fore fall.

“The move in the dollar has been so big they can’t ig­nore it,” said Ethan Har­ris, co-head of global eco­nomics at Bank of Amer­ica Mer­rill Lynch. “They have to think about the shock to the econ­omy.”

Some Wall Street firms be­lieve that the dollar will con­tinue to rocket as many for­eign gov­ern­ments and cen­tral banks fa­vor de­val­u­a­tion of their own cur­ren­cies, an at­tempt to boost eco­nomic growth by slash­ing the cost of their ex­ports.

Gold­man Sachs & Co. has told clients that it ex­pects the euro to be worth 95 cents a year from now, down from the cur­rent $1.09, and down from $1.37 a year ago.

But the dollar’s ad­vance has slowed in re­cent weeks as U.S. eco­nomic data have weak­ened. The gov­ern­ment on Fri­day re­ported that the econ­omy cre­ated a net 126,000 jobs in March, far be­low ex­pec­ta­tions.

If the Fed were to raise rates, the ef­fect could be to fur­ther stoke the dollar. That’s be­cause higher in­ter­est rates tend to at­tract global in­vestors to a coun­try’s bonds and bank ac­counts, boost­ing de­mand for its cur­rency.

What’s more, once a trend in a cur­rency gets go­ing, the sur­prise of­ten is how far it goes as spec­u­la­tors pile in. Global trad­ing in cur­ren­cies is mas­sive, ex­ceed­ing $5 tril­lion a day.

“Peo­ple al­ways un­der­es­ti­mate the big swings,” said C. Fred Berg­sten, se­nior fel­low at the Peter­son In­sti­tute for In­ter­na­tional Eco­nomics in Wash­ing­ton.

Don Riss­miller, chief econ­o­mist at in­vest­ment ad­vi­sory firm Strate­gas Re­search Part­ners in New York, said the dollar’s strength isn’t a rea­son for the Fed to put off rais­ing in­ter­est rates in­def­i­nitely.

“What it means is, yes, rates are still go­ing up — but they’re not go­ing up much,” Riss­miller said. He thinks that the ear­li­est a Fed hike could come is this fall.

More im­por­tant, Riss­miller said, is that the Fed’s hikes could come so slowly that its bench­mark rate might not reach 2% be­fore 2017. That could mean that long-term rates, such as on bonds and mort­gages, also would be slow to rise from cur­rent lev­els as long as in­fla­tion stays sub­dued.

Long-term in­ter­est rates re­main near their re­cent lows. The bell­wether 10-year Trea­sury note yield was at 1.84% on Fri­day. It has edged up from a one-year low of 1.64% in Fe­bru­ary.

The av­er­age U.S. rate on 30-year mort­gages was 3.70% last week, up slightly from a re­cent low of 3.59% in Fe­bru­ary.

Chip Somodevilla Getty Images

FED CHIEF Janet L. Yellen says the dollar is on pol­i­cy­mak­ers’ minds.

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