Rich Miller and Simon Kennedy Washington and London
THE RISING US dollar is redistributing growth throughout the global economy.
The greenback’s ascent to the highest in a dozen years on a trade-weighted basis is eroding the competitiveness of the US and countries whose exchange rates track the dollar, including China. It was also pushing down commodity prices, hurting producers such as Brazil, and threatening other emerging markets where companies borrowed in the US currency when it was cheaper.
On the flip side, the euro zone and Japan are cashing in as their companies gain the edge in world markets that economies need to boost growth. The likes of India are benefiting, too, by paying less for their energy imports.
“The dollar’s rise is sorting the world into winners and losers,” Peter Hooper, a former Federal Reserve official and chief economist at Deutsche Bank Securities, said.
The US dollar index, which tracks the currency’s performance against six of its counterparts, has risen about 25 percent from a May 6 low as investors bet the US expansion will outpace its trading partners and the Fed soon will raise interest rates while other countries retain an easy stance.
The dollar’s dominance will be high on the agenda when central bankers and finance ministers gather in Washington this week for meetings of the International Monetary Fund (IMF) and World Bank.
IMF managing director Christine Lagarde last week identified the dollar’s swing as a potential source of friction in the global economy as some benefit and others suffer.
Rebalancing
Investors already are rebalancing their portfolios. The Euro Stoxx 50 index has climbed 21 percent this year as traders bet on an upturn in the region’s economy. Airbus Group and cosmetics manufacturer L’Oreal are among companies hoping to take advantage of a cheaper currency.
The Standard & Poor’s 500 index, in contrast, has lagged, rising just 2.1 percent. More than 40 percent of sales by companies in the index are from abroad, with seed producer Monsanto and jewellery retailer Tiffany already warning that the stronger currency will restrain their profits.
Policymakers are adjusting, too. Fed chairwoman Janet Yellen and her colleagues are pointing to the dollar’s drag on the US economy as they scale back how quickly they expect to raise interest rates for the first time since 2006.
Elsewhere, European Central Bank and Bank of Japan officials have turned a blind eye to sliding exchange rates in the hope they will provide the fuel necessary to revive inflation. In India, central bank governor Raghuram Rajan has taken advantage of lower oil costs and ebbing price gains to cut interest rates twice this year.
Overall, the dollar’s rise may be a good thing for global growth.
“In an ideal world, economies with disinflationary trends – particularly the large, advanced economies – will have exported just enough deflation to the US to stabilise inflation expectations and probably growth, too,” Manoj Pradhan, a global economist at Morgan Stanley in London, said. “This would allow the US to start the process” of raising interest rates.
The currency’s last two prolonged surges – in the first half of the 1980s and the latter half of the 1990s – nevertheless caused disruptions. In 1985, the US and its allies were forced to band together in the so-called Plaza Accord to drive the dollar down after the currency’s appreciation led to an outburst of trade protectionism in America. During the late 1990s, a rising dollar helped trigger a worldwide financial crisis.
While the currency’s advance this time has not been as large, it is having an impact. Hooper and his team at Deutsche estimate it is already enough to knock as much as a 0.75 percentage point off annual US output growth during the next several years by depressing US exports.
At the Peterson Institute for International Economics, senior fellow David Stockton now sees US gross domestic product increasing 2.7 percent in 2015 and 2.4 percent in 2016. That is down about a quarter percentage point from his October forecasts. – Bloomberg