Strong dollar is unspoken ‘currency war’
THE minutes from the Federal Reserve’s meeting last month have foreign-exchange traders wondering whether chairwoman Janet Yellen has joined the currency wars.
Policymakers pointed to the dollar’s rising value as “a persistent source of restraint” on exports in a dovish set of minutes published on Wednesday. The greenback declined against a broad group of its peers.
Central bankers from Europe to Australia have engaged this year in bouts of rate-cutting oneupmanship, leaving the US, and possibly Britain, as the only developed nations likely to raise borrowing costs this year.
The dollar climbed to its strongest in more than a decade as a result, prompting billionaire Warren Buffett and Goldman Sachs Group president Gary Cohn to question whether the Fed can now increase rates without damaging the US economy.
“The Fed is finding a very subtle way to temper the enthusiasm around the risks of a sustained dollar bull market that gets out of control,” said Alessio de Longis, a macro strategist in New York at OppenheimerFunds. “What the Fed is trying to decelerate a bit is this dollar appreciation in order to make sure that the transition to a Fed hiking policy is more gradual.”
The Bloomberg Dollar Spot index, a gauge of performance against the euro, yen, pound and seven other major currencies, erased gains after the Fed released the account of its January 27-28 meeting.
The greenback’s gains this year added to a 13% jump in the second half of last year that was its strongest advance since 2008, even as the US economic recovery started to disappoint. The Citi Economic Surprise index shows US economic data falling short of expectations by the most in more than two years.
Officials are inclined to keep rates near zero for longer, with many participants saying a premature rate rise might dampen the economic recovery.
Participants flagged the ascendant dollar’s negative effect on net exports, with a few pointing to the risk the currency could appreciate further.
Mitigating those dangers are low energy prices, which may have a greater-than-forecast positive effect on growth, and accommodative policy overseas that supports the international outlook, the Fed said.
“The stronger dollar is de facto tightening,” said Greg Peters, a senior investment officer at Prudential Financial fixedincome unit in Newark, New Jersey. “It is doing much of the work for them already,” he said, adding that an increase in June is not on the cards.
Central bankers from Australia to Canada to Sweden are among those implementing monetary policies to boost growth. That stimulus has weakened their exchange rates, which helps make their economies more competitive, a knock-on effect that analysts have called a currency war.
The greenback has advanced at least 4% against each of its 16 major peers in the past 12 months. A trade-weighted index of the US currency climbed to its highest since April 2009 last month. The Bloomberg Dollar index was at 1,166.57 in New York yesterday morning, after reaching 1,174.87 on February 11, the strongest closing level since its 2004 inception.
US companies are already feeling the pinch. They are having to learn to live with a dollar rally that does not necessarily reflect a stronger economy, Mr Cohn said.
Retail sales and durable goods orders have weakened in recent months and multinationals, including Procter & Gamble and DuPont, are seeing the dollar weigh on earnings.
The currency’s strength makes it “very tough” for the Fed to lift interest rates this year, Mr Buffett said.
That said, consumer spending accounts for almost 70% of gross domestic product, while exports comprise about 13%.
“While US multinationals’ profits may have been hit, the vast majority of US firms are impacted only to a very limited extent,” Nicholas Spiro, MD of Spiro Sovereign Strategy in London, said. “US policymakers are not particularly concerned about the dollar’s strength for the simple reason that the US is a consumer-led economy.”
Futures contracts show an 18% likelihood that the Fed will raise rates to 0.5% or higher at its June meeting, down from 23% a week ago.