The Federal Reserve minutes from the last month's meeting have foreign-exchange traders wondering whether Janet Yellen has joined the currency wars. Policy makers pointed to the dollar’s rising value as “a persistent source of restraint” on exports in a surprisingly dovish set of minutes published Wednesday, says Bloomberg.
This year central bankers from Europe to Australia have took up series of rate-cutting policies, leaving the U.S., and possibly Britain, as the only developed nations seen as likely to raise borrowing costs in 2015. 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 dollar has risen at least 4 percent against each of its 16 major peers in the last 12 months. A trade-weighted index of the U.S. currency climbed to its highest since April 2009 last month.
The Citi Economic Surprise Index indicates U.S. economic data are falling short of expectations by the most in more than two years.
As the minutes showed, officials are likely to keep rates near zero for longer, with many participants saying a premature rate increase might damp the economic recovery. Analysts highlighted the ascendant dollar’s negative effect on net exports, with a few pointing to the risk the currency could appreciate further.
Energy prices, however, ease those dangers as they may have a greater-than-forecast positive impact on growth, and accommodative policy overseas that supports the international outlook, the Fed said.
The greenback rose to
its strongest in more than a decade as a result, prompting
billionaire Warren Buffett and Goldman Sachs Group Inc.
President Gary Cohn to question whether the Fed can now increase
rates without damaging the U.S. economy.
Companies
U.S. companies are already suffering difficulties. As Goldman Sachs's Cohn said, they’re having to learn to live with a dollar rally that doesn’t necessarily reflect a stronger economy. Retail sales and durable goods orders have weakened in recent months and multinationals, including Procter & Gamble Co. and DuPont Co., are already seeing the strong currency weigh on earnings.
The currency’s solidity makes it “very tough” for the Fed to lift interest rates this year, Buffett, the chairman of Berkshire Hathaway Inc., said this month. That said, consumer spending accounts for almost 70 percent of gross domestic product, while exports comprise about 13 percent, says Bloomberg.
Futures contracts show an 18 percent likelihood that the Fed will raise rates to 0.5 percent or higher at its June meeting, down from 23 percent a week ago. These expectations, however, may again be re-estimated next week when Yellen testifies before Congress.
“The minutes will heighten, even further, interest in what Janet Yellen says,” Shahab Jalinoos, the global head of foreign-exchange strategy at Credit Suisse Group AG in New York, said by phone. “The potential for big FX moves maybe has increased as a function of these minutes, but I wouldn’t say, in and of themselves yet, they’re enough to change the broader dollar trend.”
“U.S. policy makers are not particularly concerned about the dollar’s strength for the simple reason that the U.S. is a consumer-led economy,” said Shahab Jalinoos, the global head of foreign-exchange strategy at Credit Suisse Group AG.
