Janet Yellen may have to fight in the global currency war, whether she wants to or not.
The dollar is on a tear, rising to the highest in more than a decade, in part because of the Federal Reserve’s plans to raise interest rates this year. Money is flowing to the U.S., where the economy looks pretty good as Europe battles deflation and oil-dependent developing nations sputter as commodities slump.
Gary Cohn, president and chief operating officer of Goldman Sachs Group Inc., sees a big problem in all of this. The dollar’s ascent is already eating into American corporate profits, with PepsiCo Inc. predicting the trend will reduce earnings growth by 7 percent this year. Raising rates could send the dollar even higher.
“We in the United States are having to learn to live with a stronger and stronger dollar, not necessarily because we have got a stronger and stronger economy,” Cohn said in a Bloomberg Television interview Tuesday. While the Fed wants to get interest rates back to a more normal level, “they’re constrained by circumstances and they will be concerned about the strengthening of the dollar.”
As Yellen, who’s chaired the Fed board for a year now, outlines an exit from more than six years of near-zero rates, the U.S. is increasingly impacted by central banks across the globe that are beefing up their monetary stimulus programs. The European Central Bank is undertaking a new bond buying program and the Bank of Canada and Reserve Bank of Australia have been cutting rates, to name a few.
Much of the world is effectively in a race to the bottom, trying to juice exports by lowering the value of their currencies to make their goods cheaper for international consumers.
“It’s concerning to me because it’s a never-ending cycle,” Cohn said. “If you’re out there devaluing your currency and you’re forcing me to devalue my currency, how do you stop this game?”
Of course, there are some benefits to the U.S. from the global turmoil. Demand for American assets is suppressing borrowing costs, which is helpful for growth.
And while multinational corporate giants like Procter & Gamble Co. and Microsoft Corp. are blaming the dollar rally for crimping their profits, many of the companies in a U.S. economy dominated by the services industry aren’t vulnerable to swings in the foreign-exchange market. The strong dollar brings cheaper oil and less costly imports, too.
The Fed still faces a dilemma of how to extricate itself from ultra-easy monetary policy without endangering an economy that’s been slow to truly recover from the 2008 financial crisis. Sometimes being the strongest economy in a weak world isn’t such a great position to be in.
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