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Page added on February 18, 2015
Did the Fed Just Enter the Currency Wars?
The minutes from the Federal Reserve’s meeting last month have foreign-exchange traders wondering whether Janet Yellen has joined the currency wars.
Policy makers pointed to the dollar’s rising value as “a persistent source of restraint” on exports in a surprisingly dovish set of meeting minutes published Wednesday. The greenback fell against a broad group of its peers.
Central bankers from Europe to Australia have engaged this year in bouts of rate-cutting oneupmanship that’ve left the U.S. as the only developed nation forecast to raise borrowing costs in 2015. The dollar climbed to its strongest in more than a decade as a result, prompting billionaire Warren Buffett and Goldman Sachs Group Inc. President Gary Cohn to question whether the Fed can now increase rates without damaging the U.S. economy.
“The Fed is finding a very subtle way to temper the enthusiasm around the risks of a sustained dollar bull market that gets out of control,” said Alessio de Longis, a macro strategist in New York at OppenheimerFunds Inc., whose division oversees $11.6 billion. “What the Fed is trying to decelerate a bit is this dollar appreciation in order to make sure that the transition to a Fed hiking policy is more gradual.”
The Bloomberg Dollar Spot Index, a gauge of performance against the euro, yen, pound and seven other major currencies, erased gains after the Fed released the account of its Jan. 27-28 meeting.
Export Drag
Officials are inclined to keep rates near zero for longer, with many participants saying a premature rate increase might damp the economic recovery, the minutes show. Participants flagged the ascendant dollar’s negative effect on net exports, with a few pointing to the risk the currency could appreciate further.
Mitigating those dangers are low energy prices, which may have a greater-than-forecast positive impact on growth, and accommodative policy overseas that supports the international outlook, the Fed said.
“The stronger dollar is de facto tightening,” said Greg Peters, a senior investment officer at Prudential Financial Inc.’s fixed-income unit in Newark, New Jersey, which oversees $534 billion in bonds. “It is doing much of the work for them already,” he said, adding that a June increase is not on the cards.
Central bankers from Australia to Canada to Sweden are among those implementing monetary policies to boost growth. That stimulus has weakened their exchange rates, which helps make their economies more competitive, a knock-on effect that analysts have called a currency war.
Dollar Squeeze
The greenback has advanced more than 4 percent against each of its 16 major peers in the last 12 months. A trade-weighted index of the U.S. currency climbed to its highest since April 2009 last month.
U.S. companies are already feeling the pinch. They’re having to learn to live with a dollar rally that doesn’t necessarily reflect a stronger economy, Goldman Sachs’s Cohn said Feb. 10. Retail sales and durable goods orders have weakened in recent months and multinationals, including Procter & Gamble Co. and DuPont Co., are already seeing the strong currency weigh on earnings.
The currency’s strength makes it “very tough” for the Fed to lift interest rates this year, Buffett, the chairman of Berkshire Hathaway Inc., said this month.
That said, consumer spending accounts for almost 70 percent of gross domestic product, while exports comprise about 13 percent.
Profit Hit
“While U.S. multinationals’ profits may have been hit, the vast majority of U.S. firms are impacted only to a very limited extent,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, wrote by e-mail Feb. 16. “U.S. policy makers are not particularly concerned about the dollar’s strength for the simple reason that the U.S. is a consumer-led economy.”
Traders have pushed back expectations for the first U.S. rate increases since 2006. Futures contracts show a 19 percent likelihood that the Fed will raise rates to 0.5 percent or higher at its June meeting, down from 26 percent a week ago.
Those bets may again be re-evaluated next week when Yellen testifies before Congress.
“The minutes will heighten, even further, interest in what Janet Yellen says,” Shahab Jalinoos, the global head of foreign-exchange strategy at Credit Suisse Group AG in New York, said by phone. “The potential for big FX moves maybe has increased as a function of these minutes, but I wouldn’t say in and of themselves yet, they’re enough to change the broader dollar trend.”
15 Comments on "Did the Fed Just Enter the Currency Wars?"
Makati1 on Wed, 18th Feb 2015 7:10 pm
Just joined? The Fed is leading the pack in this war. Any attempt to raise interest rates will crash the whole system, I think. And, leaving them at zero is killing the economy with cheap credit and cutting the incomes of retirees from savings. Catch 22?
James Tipper on Wed, 18th Feb 2015 7:24 pm
Makati, right? It is a gigantic catch 22, I would hate to work in the Fed right now.
redpill on Wed, 18th Feb 2015 8:05 pm
I know they want to get some kind of hike in, even if it’s just 25bips, but the U.S. 10-year is already looking fat with a yield of just over 2% compared to:
Germany 0.38%
Japan 0.40%
Switzerland 0.04% (was actually negative just a week ago)
Janet’s next batch of word salad will probably be extra heavy on the patience.
BobInget on Wed, 18th Feb 2015 8:07 pm
Deflationary pressures stemming directly from
fallen petroleum oil prices have contributed
mightily to dollar weakness.
Not to worry. At this point in time USD is secure.
The Fed will be loath to raise interest rates until
oil recovers supremacy. Instead of foreign money chasing security buying bonds, hot money is going into ridiculously low US/Canadian oil/NG company shares.
Plantagenet on Wed, 18th Feb 2015 8:38 pm
The longterm trend has been to a weaker dollar. The last six months are an aberration
dave thompson on Wed, 18th Feb 2015 9:08 pm
The only long term trend that matters is the limits to growth, in a growth oriented paradigm, doomed to failure, on our finite planet.
GregT on Wed, 18th Feb 2015 10:02 pm
What dave said.
Northwest Resident on Wed, 18th Feb 2015 11:55 pm
The intricately linked gears of global finance are all gummed up by excessive debt and energy deprivation. BAU is grinding to a halt, slowly but surely, and at an ever quicker pace. Dramatic currency adjustments are like aces in the hole — you don’t pull them out until you’ve played all your other cards. Pure desperation is what we are witnessing, though you can be sure that the official view of events is “all is well”. Just go read Yahoo main page. There are still plenty of “guaranteed” investment opportunities in shale oil, lots of stocks that the billionaires are all buying so you should too, great news every day. But peel back the veneer, and you’ll see the frenzied roaches and assorted bugs scurrying, panicked, desperate, fighting a losing battle to keep it all together. Reality and hard physical limits are headed our way, and coming on fast. We all have a date with destiny scheduled on a calendar that we don’t control.
Perk Earl on Thu, 19th Feb 2015 12:49 am
Raise interest rates? Think the Fed might? Nope. They claim below it’s concern over low inflation, but I think it’s because they know defaults will follow.
http://www.usatoday.com/story/money/2015/02/18/fed-meeting-minutes-january/23616153/
“Federal Reserve policymakers expressed growing concerns last month about low inflation and said they were inclined to keep interest rates near zero for longer to avoid derailing the recovery, according to minutes of the Fed’s Jan. 27-28 meeting.”
Davy on Thu, 19th Feb 2015 6:19 am
I look at BAU as having two primary foundational elements. The systematic complexity is so much greater and that points to our human dilemma of using linear thinking to discover a nonlinear reality but for our discussion here it works. I like to generalize and get to the basics. If we want to get to the heart of what makes BAU tick then we are talking the financial system and oil.
BAU is global, complex, and energy intensive. It is the financial system that delivers and make value of oil. Oil makes a global and complex financial system possible. The two are linked like blood and the heart are. The Fed would be like the aorta valve. The Fed is critical node central bank because of the importance of the dollar in world trade and as the currency of a major economic power.
Currently we see both aspects of BAU circulatory system in sickness. The oil side is leaving the bumpy plateau we have seen since the vicinity of 2005 when conventional oil appears to have peaked. Nine years later we are likely in the bumpy descent. We can see a clear disequilibrium with the economy and oil from the POD & ETP of oil. All those Peak Oil dynamics are converging and causing feedbacks into the economy. The underlying POD dynamic of ETP “is the amount of usable energy supplied per gallon to the general economy” per Hills group. This appears to have dropped below the half way mark in 2012.
The global economy is extremely sensitive in a macro sense to the reduction in energy supplied i.e. limits of growth of which energy is the most primary. The economist have been at a loss why the economy cannot make a breakout from the GFC of 2008. This is because economist discount energy in their supply demand equations of econ 101. Economist discount general limits and diminishing returns. Both the foundational elements of BAU, oil and the financial system, are at limits and diminishing returns.
The financial system is so important to BAU because globalism requires a massive and complex liquidity and confidence. Globalism with its dispersed production and distribution has by its nature a huge requirement for liquidity, trust, and confidence. All our locals have been delocalized in a dependence on the global BAU which is an amalgamation of all our dispersed locals. No economy or region can survive as a BAU without the BAU fundamentals of finance and oil.
The BAU financial system is at the limits of debt and liquidity. This puts confidence and trust at those same limits. Currently the financial system has become a hybrid market and central bank system. The fundamentals we once knew have now been coopted by a system of repression and monitarization of debt to maintain liquidity, trust, and confidence. The unintended consequences of these actions are wealth transfer, cannibalization of the public for individual gains, market bubbles, and economic deflation of the real economy. The real and the digital economies have gone through a bifurcation. This disequilibrium from their divergence has created a financial system that does not react with normal fundaments. All systems cycle even the current repressed and monetize system cycles.
The Fed is at a loss how to gain its tools back. It is without tools currently. QE has clearly hit limits of effects. The Fed is unable to raise rates to get backs one its most fundamental tools of economic management. One of the most significant central bank is naked and unable to cloth. All central banks are naked and drifting in space. All currencies are in volatility at the moment loosing stable anchors. The dollar has appreciated making the huge global carry trade dangerously in disequilibrium.
Markets are in false exuberance and the whole Ponzi scheme of debt in destabilizing. When you mix the other foundational element of oil into this equation you see there is little hope of normalization from the Fed or other central banks. From here on out it is descent. The financial system and the oil complex are in descent so BAU is in descent. It’s over my friends. Time frame is debatable. We know the oil brick wall is maybe 5 years down the road and the financial train wreck is at any time or down the road being nothing more than human nature. All else will follow these two foundational elements.
shortonoil on Thu, 19th Feb 2015 8:41 am
38% of the world’s economy is powered directly by oil, and the system that was built over the last century and a half to supply it is falling apart:
http://www.thehillsgroup.org/depletion2_022.htm
The world’s dependence on oil ends when the world’s producers can no longer breakeven on its production. It has nothing to do with reserves, resources, or Central Bank meddling. It is the inevitable conclusion to the depletion process. Along with a gigantic industry to supply petroleum came gigantic institutions to service it. Massive federal governments, militarism, educational institutions, and of course, the monetary systems to support them. To survive, each must now vie for an every declining piece of the pie. From here on forward, each must strive to prevent its own extinction.
What the FED does now, and into the future will be to reduce the odds of its own termination. What it is doing now resembles a doubling down in a continually losing crap shoot. Cutting interest rates has produced massive mall-investments in golf courses, shale, derivatives, and apartment building in Shanghai that no one lives in. Raising them would collapse what is left of the present economic system. The FED is kicking the can down the road, and the can is the FED.
As the pie continues to shrink, and oil producers call it quits, and nothing remains to plate their gilded halls institutions will turn on one another to find subsistence. The cannibalization of the system has begun. Don’t expect their feeding frenzy to be constrained by an illusion of social well being. Don’t expect the FED to be a discriminant feeder!
Apneaman on Thu, 19th Feb 2015 10:34 am
Short, You description of the Fed can be applied to most institutions and many of the people who run them. Almost nothing seems to work like it used too.
Makati1 on Thu, 19th Feb 2015 10:31 pm
Yes, we have become a world of zombies and cannibals. It would be funny if it wasn’t so tragic. I wonder what the billions who have no idea what is happening, would think if they knew?
GregT on Thu, 19th Feb 2015 10:51 pm
“I wonder what the billions who have no idea what is happening, would think if they knew?”
Try explaining it to them, and you will get your answer.
Go Speed Racer. on Fri, 20th Feb 2015 5:13 am
They will take a drag on their cigarette and blow it in your face. And your tax money paid for those cigarettes. They bought them with food stamps. That’s what the great majority has to say about it.