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HomeEconomyHistoric surge in dollar may be music in Fed's ears: McGeever

Historic surge in dollar may be music in Fed's ears: McGeever

by Jamie McGeever

ORLANDO, Fla. (Reuters) – The U.S. dollar surged against the world’s major currencies, on track for its biggest calendar-year gain since nearly years and the third largest since President Richard Nixon removed the dollar from the gold standard more than half a century ago.

Will the Fed be worried? Not at all.

On the contrary. All else being equal, a stronger dollar would help ease price pressures by lowering import costs and tightening financial conditions, both desirable goals that Jerome Powell and colleagues are trying to achieve 75 – annual high inflation back to the 2% target.

Federal Reserve July meeting minutes 26-24 policy meeting – the second straight meeting raised the federal funds rate by 30 basis points – showing policymakers taking a stronger dollar as a drag on import prices as one of the few factors that could bring inflation back under control.

Debate over the impact of the U.S. dollar on U.S. inflation in the post-pandemic world is growing. But the Fed would rather let the exchange rate appreciate than not appreciate.

“The Fed will be inclined to let it run, there is no incentive to stop it. The dollar appreciation doesn’t hurt, if that helps,” Brad Bechtel, global director Said the head of FX at Jefferies in New York.

Chart: USD Index and Trade Weighted USD

The dollar hovered near 24 year highs against a basket of major currencies. Year-to-date up 13.5% – on track for biggest calendar year gain since

and is the third largest since the dollar-gold convertibility ended with 1984.

YOY The U.S. dollar has gained about 17% this year based on the more common measure of inflation. This is the biggest deflationary impulse since 2015 and many believe it will only intensify due to the difference in interest rates.

Chart: USD Index and YoY Change

The Federal Reserve is committed to further raising interest rates, unlike the central banks of Japan and China. The People’s Bank of China is now moving in the opposite direction.

Additionally, markets are betting that the U.S. economy will fare better in the coming winter than the energy-crunching U.K. and euro zone economies. If a global recession snowballs, safe-haven demand for U.S. Treasuries abroad may be would naturally push the dollar lower.

Indirect benefits

According to Jefferies’ Bechtel, a basic rule of thumb in the past has been that the broad value of the U.S. dollar rose % equivalent to approximately 99 basis points of policy rate tightening .

Economist estimates of Societe Generale (OTC: SCGLY) 10% The appreciation of the US dollar reduces US consumer inflation by 0.5 percentage points in a year.

A paper by the Kansas City Fed in August 17 found that, at least so far, A stronger dollar has a fairly limited impact on consumer prices.

They estimate that the broad dollar appreciation of 8.5% since last May has lowered annual core PCE inflation by about 0.2 percentage points. A further 5% appreciation by the end of next year would increase this resistance to 0.33 percentage points.

This is pretty mild.

In a paper titled “Recent appreciation of the US dollar is unlikely to have a significant impact on domestic inflation.

Chart: The impact of the US dollar on inflation – Kansas City Fed

The paper found that due to pandemic-related With distorted U.S. import demand and supply disruptions, the inflation-damaging power of a strong dollar today is likely to be more subdued than it has been in years past. https://

If Fed policymakers agree with this, they have reason to feel bad about the current exchange rate Very satisfied, and wouldn’t mind further exchange rate strengthening.

In fact, as long as the appreciation doesn’t go too fast to cause wider financial market disruptions, they might be happy to accept it.

“A stronger dollar is a positive side benefit of Fed policy, so it’s an indirect benefit for the Fed,” said John Silvia, economist and founder of Dynamic Economic Strategy.

There are signs Indicating that financial markets are beginning to feel the dollar’s recent sharp rise. Goldman Sachs’ (NYSE: GS) U.S. Financial Conditions Index (FCI) rose 26.5 basis points last week 99.30.The bank said the largest single ingredient .2 bps to the U.S. dollar.

This reversed about a third of the FCI’s easing in financial conditions since June on a rebound in equity and credit markets, although the Fed pushed two 99 bps rate hike.

Fed music, but will almost certainly want to hear more.

(here Opinions expressed are Fed opinion author, Reuters columnist.)

Related column:

The skewed energy shock is Expensive Dollar Charges (August 24)

Hedge Funds Toggle on Dollar, Yield Curve ( August )

(Jamie McGeever)



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