A Strong Dollar Is in the Best Interest of Everybody Else

September 11, 2014

In the mid-1990s, former U.S. Treasury Secretary popularized the phrase that “a strong dollar is in the best interest of the United States.”  What he meant was that if the dollar is expected to appreciate, it will suppress actual and expected U.S. inflation, reduce long-term interest rates, promote business spending and direct investment inflows by foreigners, eradicate the temptation among reserve asset holders to diversify out of U.S. currency into other monies, and enable the Fed to keep its interest rates lower than otherwise would be the case.

Nowadays, officials in other countries are cheering for a stronger dollar against their own currency. 

  • A statement today from Reserve Bank of New Zealand Governor Wheeler called the kiwi’s level “unjustified and unsustainable” and predicted “a further significant depreciation [of the kiwi], which should be reinforced as monetary policy in the United States begins to normalize.”
  • Each month, Governor Stevens of the Reserve Bank of Australia complains that the Australian dollar is overvalued relative to “estimates of its fundamental value” amid falling commodity export prices and resource-sector earnings and planned investment.
  • An official of the Swiss National Bank this week said negative interest rates may be implemented to contain upward pressure on the franc and promote growth.
  • A major intermediate objective of Japan’s quest to secure higher inflation and expected inflation has from the beginning of the Abe Administration been sustained and significant yen depreciation.
  • The European Central Bank eased monetary policy significantly in June and again this month even though the euro has been trending lower.

U.S. government and central bank officials have been silent about the rising dollar.  Inflation is not expected to rise to target for quite a while longer.  The U.S. trade data have evolved along a better trajectory than expected.  Dollar appreciation means lower prices paid by Americans for imported goods.   At present when the Washington needs stronger economies in Europe and Japan to promote social tranquility and support allied support to fight global terrorism, a rise in the dollar not only will elicit no complaint from the Obama Administration but in fact be welcomed as a constructive development for everybody.

New thinking about the timing of the first federal funds hike has shifted recently from mid-2015 to closer to March of next year.  Chair-person Yellen has implied that proper communication will require about six months of lead-time guidance, and so the rumored shift in next week’s FOMC statement is grounded strongly in logic assuming interest rates are first raised in March. 

More importantly, the world is poised for the first unsynchronized configuration among major central banks for the first time since the Great Recession.  This would be big news.  All these central banks have been converged near a zero interest rate policy for a long time.   The Fed funds target has been 0.25% or lower since end-2008.  The British Base Rate has been 0.5% since March 2009.  Japan’s overnight money rate has not exceeded 0.5% since September 1995.  The ECB refinancing rate was 1.0% by end-2009, 0.25% by end-2013, and 0.05% currently.  The Ezone deposit rate of -0.2% is plumbing more deeply below zero.  Diehards in the ECB are resisting quantitative easing, and their counterparts in the Bank of Japan remain convinced that more stimulus is not going to be necessary.  But from a currency market response standpoint, it will be more important for the Fed to shift toward less accommodation than whether and how much central banks that have been running low interest rate policies augment existing stimulus.  The U.S. instance involves something new, a policy reversal.  The other instances do not connote a change in direction, and so are less newsworthy.

How far might the dollar rise.  I like to think in terms of a return to June 2010 as a medium-term achievable but not guaranteed objective.  That’s when the dollar hit its strongest post-Great Recession level against the euro, $1.1875, and was trading around JPY 110. 

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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