lunes, 12 de enero de 2015

lunes, enero 12, 2015
Review & Outlook

The Double-Edged Dollar

The rising buck is good for consumers, but watch out for overshooting.

Jan. 6, 2015 7:19 p.m. ET



The most important economic story these days is the relentless rise of the dollar, with effects good and ill. We’d be more confident of the benefits if the world’s central bankers appeared to be navigating this monetary weather with any kind of rudder.

As notable as the magnitude of the greenback’s rise has been its rapidity: 13% against the euro and some 15% against the yen since the end of June. Capital that had flowed into emerging markets since the world financial panic is now heading back to the land of the free and its relative economic strength.

In some ways this is good news for the U.S. because it marks a recovery from the weak-dollar Bush and Obama years and echoes of the strong-dollar mid-1980s and late 1990s. Both strong-dollar eras featured disinflation, falling interest rates, investment flows into the U.S. and economic booms. They were also notable for falling prices for commodities traded in dollars, such as oil, which nearly reached $10 a barrel in 1998 as the dollar soared. One reason Bill Clinton survived impeachment is that gasoline sold for 89 cents a gallon.

The greenback’s current rise is contributing more than is commonly understood to a similar plunge in oil, with the world price falling to $51 a barrel from $112 as recently as June.

Gasoline has fallen by more than $1 a gallon in much of the country. This is great news for consumers who can now devote less of their after-tax income to energy.

All other things being equal, we prefer a strong and stable dollar to a falling one. But note the word stable. Currency volatility has costs, as Nobel laureate Robert Mundell teaches, and movements as far and fast as the dollar’s could create some economic wreckage.

One consequence is the rush out of emerging markets of the kind that hasn’t been seen since the late 1990s. Energy- and commodity-related stocks and bonds are also taking a hit, and there may be major casualties. The U.S. Farm Belt and oil patch will suffer. While the pain follows an extended boom, this will be small consolation to over-leveraged companies and investors. Texas and other oil boom states should adjust their budgets now.



Readers may recall that the late 1990s saw the Asia currency crisis, the collapse of Long-Term Capital Management, and the first run on the ruble. Bad things happen amid rapid price shifts.

In the 1990s the Federal Reserve could and did help the economy adjust to those shocks by cutting interest rates, but the Fed has no such leeway today with its short-term rate set at near-zero.

Perhaps the best reason for mixed feelings is that much of the dollar’s rally is rooted more in economic weakness overseas than in U.S. strength. The global economy has slowed sharply, with Japan, France and Russia in recession, China decelerating as it adjusts to previous malinvestment, and Europe overall barely growing.

Japan and Europe are contributing to the dollar’s surge by actively pursuing yen and euro devaluation—cheered on by the U.S. Treasury. The play is to help their exporters ride on the back of what they hope will be an accelerating U.S. expansion. For Europe and Japan, monetary policy has become the default alternative to supply-side economic reform.

But as Japan has shown since Prime Minister Shinzo Abe and the Bank of Japan began their weak-yen policy in 2013 (see nearby chart), devaluation may help some exporting companies but it can’t stimulate domestic competition and demand. It isn’t likely to work much better for Mario Draghi and the European Central Bank.

The U.S. Federal Reserve, meanwhile, is signaling a possible monetary move in the opposite direction, getting off zero-bound interest rates for the first time in more than six years. This lack of central bank coordination contributes to currency volatility, as each nation pursues what it sees as its own economic interests, no matter the impact abroad.

San Francisco Fed President John Williams gave currency traders a jolt on Monday by saying the strong dollar means there is less urgency for the Fed to raise rates or begin reducing its $4.5 trillion balance sheet. But delay runs the risk of increasing the distortions in financial markets caused by the Fed’s monetary exertions, especially if U.S. growth accelerates. And the irony of the last year is that U.S. growth has increased even as the Fed ended its program of bond purchases.

The biggest danger would be if the dollar overshoots on the strong side, as it arguably did in the 1990s. This could mean far more destruction here and abroad, in the commodity economy in particular, including to the U.S. energy boom. As U.S. companies suffer from Japanese and European competition, protectionist pressure could increase just as President Obama and Republicans are trying to pass trade-opening legislation.

All of which is a reminder that there is no free market in currencies, because their supply is controlled by the world’s central banks. The major central bankers need to pay attention as much to currency fluctuations as they do to their national economies. A stronger dollar would help the world more if it were also stable.

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