The surge in the US dollar that helped convince the US Federal Reserve to refrain from raising interest rates until at least next month also supports the notion that it is to be a shallow path higher.
Currency strength is a dilemma for Fed Chair Janet Yellen as policymakers prepare to boost rates from almost zero.
The US dollar’s surge, which reduces the cost of imports and makes it harder for prices to rise enough to reach the central bank’s 2 percent inflation goal, might damp the pace of rate increases and punish the US currency against its major counterparts.
“The Fed’s already mentioned in some recent statements that they are concerned about the impact of a very strong dollar,” said Lutz Karpowitz, a senior currency strategist at Commerzbank AG in Frankfurt. “That means that the moment the dollar appreciation would be too strong, the Fed would adjust its monetary policy. The rate-hike cycle could be even more cautious than the market so far expects.”
The US dollar has gained 11 percent this year, according to Intercontinental Exchange Inc’s US Dollar Index. The gauge rose 0.3 percent to 99.897 as of 6:07am London time yesterday, approaching the 100.39 level reached in March that was the strongest since April 2003.
It is to drop 2.5 percent to 97.4 by the end of the year, according to the median estimate in a Bloomberg survey.
Comments by high-ranking Fed officials on the US dollar’s level and monetary policy decisions have become more explicit and formal.
The decision to delay raising rates has helped offset headwinds caused by a strengthening US dollar, Fed Vice Chairman Stanley Fischer said in a Nov. 12 speech.
Restrained growth owing to the US dollar would persist well into next year and spell continued weakness in the traded-goods-producing sectors, he said.
“In years past, the only people that have talked about the dollar were in the [US] Treasury and the only thing they would say is a stronger dollar was in the US’ interests,” said Daragh Maher, head of US foreign-exchange strategy at HSBC Holdings PLC in New York.
“What we’ve seen over the course of this year is a Fed that’s happier to highlight what a stronger dollar means in terms of economic growth, inflation and rates. And Fischer’s speech is part of that strategy,” he said.
Evidence of the US dollar’s effect on the economy includes making US-produced goods less attractive in overseas markets.
US exports totaled US$188 billion in September, down 5 percent from an all-time high in October last year, according to Commerce Department data.
US companies also face increased international competition. Prices of non-oil imported goods tend to fall 3.2 percent for every 10 percent appreciation of the US dollar, according to an analysis released on Wednesday by New York Fed researchers Thomas Klitgaard and Patrick Russo.
While considering the currency’s effect on the economy, the Fed lacks full control.
Global central banks have been cutting borrowing costs and adding monetary stimulus to keep their economies afloat, making currencies less attractive versus the greenback.
The European Central Bank might boost its stimulus programs as soon as next month as inflation wanes and economic prospects worsen.
The Bank of Japan kept its unprecedented easing program unchanged on Thursday after a report showed the country slipped into a recession in the third quarter.
China, the world’s second-biggest economy, has cut rates five times this year.
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