Is the dollar taking over the Fed’s job?

May 5, 2015

US trade










While the surge in the greenback since July has turned up in all sorts of economic data, much of it not good, the big one may have just landed.

The U.S. trade deficit expanded in March by the largest amount in percentage terms in nearly two decades to a 6-1/2 year high, completely trouncing all forecasts.

Much of that can be explained away simply. A serious trade stoppage at West Coast ports where goods were sitting idle on ships during a labor dispute in January and February ended, turning up in a surge of imports the following month.

But there is another trend settling in.

The dollar has made the cost of U.S. exports to foreign buyers much more expensive in a very short period of time, while at the same time making the price of everything else sold abroad and bought in dollars look a lot cheaper.

That has done two things at the same time. Not only will it make an already dismal set of GDP data in the first quarter almost certainly shift from barely any growth at all to a small contraction, but it has kept imported inflation under control.

That means the dollar is doing the Fed’s work for it before it even has had a chance to raise interest rates from record lows.

Data like these keep contributing to an overall perception that a long-expected rate hike will keep getting kicked down the road. June is looking more like a long shot than the near-certainty a short while ago; September is more likely. A delay until later might look even more more realistic.

“In a sense, this is the Fed tightening in action, restricting growth even before it happens,” wrote Chris Low, chief economist at FTN Financial, in a note.

The optimistic view is that a strong dollar, with a resurgent U.S. consumer, could be very good for world trade and many economies keen to export to the world’s largest united collection of once-voracious consumers. After all, what the world economy has been sorely lacking since the financial crisis is solid demand.

And there are other signs, like the latest ISM services index, which suggest the economy will bounce back strongly in Q2.

Another view is that the dollar may be holding back the U.S. economy and the Fed – look, for example, how it has beaten down corporate profits – more than anyone currently thinks.

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