Dollar Holds Key to Whether Fed Has Scope to Raise Rates in Juneby and
Central-bank tightening talk boosts greenback, limits options
Currency strength curbs inflation, crimps corporate profits
As soon as the Federal Reserve released meeting minutes describing a weaker dollar, the currency surged to a seven-week high.
That’s the dilemma facing U.S. central bankers, who are weighing economic data to determine when next to raise interest rates. The Fed’s signals of a potential June move may backfire if the resurgent greenback undermines growth and weighs on stocks and oil prices, ultimately eroding the case to boost borrowing costs.
The dollar’s surge since mid-2014 hurt the outlook for growth and inflation, and contributed to the Fed delaying to December its liftoff from near zero, according to strategists. Officials from Janet Yellen to Stanley Fischer have warned that the dollar’s appreciation will limit the pace of tightening.
“The Fed’s in a bind,” said Douglas Borthwick, the New York-based head of currencies at Chapdelaine & Co., a unit of the British interdealer brokerage Tullet Prebon Plc. “The Fed can’t raise rates because it means a stronger dollar, and it means deflationary pressure in the world. The Fed’s under pressure to talk a mighty game, but it can’t actually do a lot.”
A rebounding currency may put pressure on U.S. companies that derive revenue overseas, delaying a recovery from a year-long profit decline that’s been worsened by the dollar’s 25 percent rally from mid-2014 to January. The greenback has advanced for the past two weeks, snapping three months of declines.
More than one-fifth of S&P 500 companies get at least half of their sales outside the U.S., according to financial filings compiled by Bloomberg from firms that disclosed their geographic breakdown.
“The Fed says it’s data dependent, but the Fed is also market dependent because they talk about financial market conditions,” said Nick Sargen, who helps manage $46.2 billion as chief economist and senior investment adviser for Fort Washington Investment Advisors Inc. in Cincinnati, Ohio. “The crazy situation is that if the economy is doing better, you get the expectation that the Fed is in play. Then you could get the dollar higher, which is a drag on the economy, and then the stock market softer, which is an adverse wealth affect."
The Bloomberg Dollar Spot Index, which tracks the greenback versus 10 peers, rose 0.8 percent on Wednesday, reaching the highest level on a closing basis since March 28. It added 0.1 percent as of 7:52 a.m. in New York.
Should the dollar continue its rebound, commodities producers stand to suffer. The greenback’s rally Wednesday rekindled a rout in prices for resources from crude oil to copper and gold. Miner Freeport-McMoRan Inc. and Dow Chemical Co. dropped, dragging raw-materials shares to the biggest retreat in two weeks.
“The Fed’s very thought of a June increase -- much less the signals it may have been trying to convey to decrease the risk of complacency -- could reverse some of the very trends they liked so much,” said Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee.