Currency War Brings Strong Dollar
Sometimes the news stories on Wall Street fit neatly together like a jigsaw
puzzle. Japan has been trying to devalue their currency for some time. Quantitative
easing was announced last week in Europe to combat slow growth and low inflation.
All of the attempts to devalue have created demand for the U.S. dollar. On
January 8, The
Wall Street Journal noted the challenges a strong dollar brings to the
Fed's Open Market Committee, which is releasing their latest statement Wednesday:
U.S. policy makers would be furious if other countries try to "steal" growth
by putting American exports at a disadvantage. But there is probably little
that can be done to stop these competitive devaluations once they begin.
The Fed could theoretically keep interest rates at or near historic lows
far beyond 2015, hoping that this would reduce the attraction of owning
dollars. But this is problematic if the recent spurt of U.S. growth continues
or accelerates. The Federal Open Market Committee is committed to bringing
interest rates up to a historically more normal level. Aside from the dollar
legally being a Treasury Department responsibility, the Fed's primary concern
is the systemic risks from domestic asset bubbles if policy is not tightened
as growth picks up, not baby-sitting countries that are devaluing.
Why does the Fed care about a strong dollar? The blurb below is from the front
page of today's Wall
Street Journal:
The stronger dollar is slicing sales and profits at big American companies,
prompting them to put renewed emphasis on cost cutting and cramping the
broader U.S. economy. The currency effects are hitting a wide swath of
corporate America--from consumer products giant Procter & Gamble Co.
to technology stalwart Microsoft Corp. to pharmaceuticals company Pfizer
Inc. Those companies and others have expanded aggressively overseas in
search of growth and now are finding that those sales are shrinking in
value or not keeping up with dollar-based costs.
All of the above should make for a very interesting statement from the Federal
Reserve later today.
