Tags: dollar | strength | trouble | economy

WaPo's O'Brien: Dollar's Strength Could Cause Trouble for US Economy

By    |   Thursday, 26 February 2015 07:00 AM

Here is an interesting irony for the dollar. Its recent surge — the greenback hit an 11-year high against the euro last month and a seven-year high against the yen in December — reflects the economy's strength.

But a continued ascent by the dollar could cause trouble for the economy, says Washington Post reporter Matt O'Brien.

"The real risk [for the Federal Reserve] is raising rates too soon, just because it seems like we should, even though wages and inflation are quiescent," he writes. Rate hikes would likely push the dollar up further.

"For the first time in a long time, the economy's growth looks strong and sustainable," O'Brien says. "The only thing that can stop it is if we make our exports uncompetitive and our imports too competitive. In other words, if we let the dollar get too strong."

The result would be 1.5 to 2 percent economic growth instead of 2.5 to 3 percent, he argues. That would "leave the shadow unemployed on the sidelines forever." GDP expanded 2.4 percent last year, the fastest pace since 2010.

Meanwhile, with the dollar having risen 3.6 percent against the yuan since January 2014, China has entered the currency war.

And that's a mixed big for the world's second largest economy. While the yuan's slide greases China's export machine by making its goods cheaper in foreign currency terms, it also pushes global investors away from the country.

From 2005 until early 2014, China allowed a gradual appreciation of the yuan, amid strong prodding from the United States. But for now anyway, it has abandoned that policy.

That's bad news for Chinese companies and banks that have borrowed an estimated $1 trillion of debt in dollars over the past five years, expecting the yuan's ascent to continue, the New York Times reports. Yuan depreciation would make their debt less expensive, but the yuan's drop makes it more expensive.

"They [China's central bank] cannot afford to let it [the yuan] depreciate too quickly," Liu Li-gang, a China economist at ANZ bank, told The Times. "Firms could be pushed into default."

The dollar stood at 6.2599 yuan Wednesday morning.

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The dollar's recent surge reflects the economy's strength, but a continued ascent by the dollar could cause trouble for the U.S. economy.
dollar, strength, trouble, economy
Thursday, 26 February 2015 07:00 AM
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