Despite pumping trillions of fresh Greenbacks into the system through Quantitative Easing, America’s currency has been on a rip. The US Dollar has appreciated against all currencies, including the hapless Rand (what cost R11.40 a month ago is now R12.40). Judging by comments from those quoted in the Bloomberg article below, the trend isn’t going to end anytime soon. The message is clear: despite making U.S. exports less competitive, Washington is comfortable with a Stronger for Longer currency. For now anyway. – AH
(Bloomberg) — The dollar is surging. U.S. policy makers look prepared to live with it.
While officials have pointed to the difficulties posed by the currency’s rise — it holds back economic growth and suppresses already too-low inflation — they’ve indicated no willingness to stand in its way. Treasury Secretary Jacob J. Lew has repeated the mantra that a strong dollar is in America’s interest, while Federal Reserve Vice Chairman Stanley Fischer has said it’s a sign of U.S. economic might.
The rising dollar “is a concern and policy makers will be watching it closely,” said Charles Collyns, chief economist at the Institute of International Finance in Washington and a former Treasury official. But “it’s not a catastrophic shock. It is something that was expected to happen as a consequence of the great divergence of monetary policy between the U.S. and elsewhere.”
Lew, who’s scheduled to testify on the international financial system before a House committee Tuesday, may shed light on his tolerance for dollar strength. The central bank’s Federal Open Market Committee meets on Tuesday and Wednesday to map monetary strategy, and economists say the greenback’s rise is sure to be discussed.
The phrase “strong dollar” has appeared six times in the two editions this year of the so-called beige book, a regional review of the economy that helps inform FOMC members before each meeting. That’s more strong-dollar mentions in the report than occurred in the past decade and a half.
Rate Delay
All other things equal, the currency’s strength argues for the central bank to delay raising interest rates, said Edwin Truman, who is now a senior fellow at the Peterson Institute for International Economics in Washington after spending 25 years at the central bank and the Treasury.
The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, has climbed more than 20 percent since the middle of last year as the Fed has signaled its intention to raise rates this year while the European Central Bank and the Bank of Japan have acted to aggressively ease monetary policy.
In real, inflation-adjusted terms, the dollar is still well below its level 30 years ago, when the U.S. and its allies banded together at the Plaza Hotel in New York in September 1985 to drive down the currency.
“We’re a long way from where we’ve been in the past, especially in the 1980s,” said Truman, who was at the Fed at the time of the Plaza Accord.
Patient Pledge
In perhaps a sign of policy makers’ equanimity, the Fed is expected to take another step this week toward raising rates by dropping its pledge to be patient when it comes to tightening credit, according to Roberto Perli, a partner in Washington for Cornerstone Macro LLC and a former Fed official.
“Removing the qualifier of ‘patience’ from the Fed’s official statement borders on ‘ringing the bell’ on a rate hike,” Joseph Carson, director of global economic research at AllianceBernstein LP in New York, with $488 billion in assets under management, said in a March 13 note to clients.
Yellen and her colleagues probably will consider the dollar among other factors in discussing whether to delay their long- awaited rate increase, former Fed Chairman Alan Greenspan said in response to a question on Bloomberg Television on March 13. He declined to speculate on what the outcome of those discussions would be, though he did note that “a stronger dollar tends to suppress the general domestic price level.”
Inflation Target
The Fed’s preferred inflation gauge, the personal consumption expenditures price index, rose just 0.2 percent in January from a year earlier and has been below the central bank’s 2 percent target for 33 straight months.
Yellen has said the Fed will need to be “reasonably confident” that inflation will accelerate to the central bank’s goal over time before raising rates. The Fed cut its benchmark rate effectively to zero at the end of 2008 and has held it there since. It last increased rates in 2006.
A 10 percent rise in the dollar tends to reduce growth and inflation by about 0.25 percentage point the following year, according to Ethan Harris, co-head of global economics research at Bank of America Corp. in New York and a former central bank official. He said the Fed is “whistling past the graveyard” in not paying more attention to the impact of the dollar on the economy, especially inflation.
Variety of Forces
In his appearance on Bloomberg Television and in a subsequent interview, Greenspan stressed that there’s a variety of forces behind the dollar’s rise, and the U.S. on its own can’t resolve them.
“It’s clear that the American economy is doing better than the rest of the world,” he said. “That’s not the same thing as saying the American economy is doing well. It’s just that Europe is in terrible shape.”
Many other countries, including Russia and Brazil, also are experiencing difficulties, he added.
“It is not readily clear that the U.S. can readily make major changes in the dollar exchange rate because it is such a critical currency,” Greenspan said. “The types of action that we would have to take are probably outside the realm of where we would think it is good policy.”
He dismissed a suggestion of a rerun of the 30-year-old Plaza Accord. “I can’t think of who would come together under what conditions,” he said.
Group of 20 finance chiefs last month stood by a two-year- old pledge not to resort to currency devaluations to spur economic expansion while continuing to bless easier monetary policies so long as they’re focused on lifting domestic demand.
Growth ‘Headwind’
In January, Lew said a strong dollar is “good for America” and reflects the U.S.’s economic strength relative to the rest of the world. Jason Furman, chairman of the White House Council of Economic Advisers, on March 10 said a stronger dollar and weaker growth abroad would present a “headwind” for U.S. exports.
Given that the dollar’s rise has been driven by divergent monetary policies, the Treasury probably will refrain from criticizing other countries for the actions they’re taking or for their exchange-rate stance, Collyns said. Instead, the U.S. will call on them to adopt a broader range of policies to boost growth rather than relying on monetary moves alone, he said.
Some U.S. companies have begun to complain about the strength of the dollar. Bob Shanks, chief financial officer for Ford Motor Co., said in a Jan. 29 interview that the weak yen gives Japanese automakers as much as $11,000 more profit per car. Dearborn, Michigan-based Ford wants the U.S. to intervene against what it sees as currency manipulation.
Low Unemployment
The political pressure for action has been muted by the steady drop in unemployment, Collyns said. At 5.5 percent in February, the jobless rate is at the top end of the 5.2 percent to 5.5 percent range most Fed policy makers reckon is equivalent to full employment.
“We’re not seeing major concerns about the losses of jobs or factories being shut down,” Collyns said.
That’s in contrast to the last decade, when a flood of Chinese exports to the U.S. all but wiped out some American industries. Since then, the growth of Chinese shipments has slowed as the country has sought to shift the focus of its economy away from exports to consumption.
“They do seem to have put their mercantilist strategy aside,” said Jared Bernstein, former chief economist for Vice President Joe Biden who is now a senior fellow at Center on Budget and Policy Priorities in Washington. “I don’t think the Chinese currency is particularly misaligned,” he added.
Trade Agreements
Lawmakers for their part have been focused on a tussle over whether to include sanctions for currency manipulation in international trade agreements. The Treasury opposes such a move, arguing that it would undermine the department’s foreign- exchange negotiations and would be counterproductive.
The discussions in Congress have “sensitized” lawmakers to the distinction between manipulation — where a country intervenes in the market to drive a currency down — and changes in exchange rates that are driven by macroeconomic policies, such as quantitative easing, said Fred Bergsten, a founder of the Peterson Institute and a former Treasury official.
Because the dollar’s recent rise has resulted from monetary moves rather than manipulation, that helps defuse any protectionist sentiment in Congress, he said.
Still, if the U.S. currency continues its relentless climb, pressure for action by policy makers will build, according to Bergsten.
“We’re not at a critical point yet,” he said. “But if you got a new wave of manipulation by China and other Asian nations on top of the market-driven moves of the euro and the yen, the trade-weighted dollar would really skyrocket, and the U.S. would have to react.”
