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DoubleLine's Gundlach: 'If Dollar Goes Higher, Fed Isn't Likely to Raise Rates'

By    |   Friday, 10 April 2015 07:20 AM

The dollar's upward surge has thrown a wrench into the Federal Reserve's planning for interest rate hikes.

"If the dollar goes higher, the Fed is not likely to raise rates," star investor Jeffrey Gundlach, CEO of DoubleLine Capital, said in a call with investors this week, Think Advisor reports.

The U.S. Dollar index, which measures the greenback against six major currencies, hit a 12-year peak last month. While it has slipped below that level, the U.S. currency has rebounded, and many experts expect it will continue rising.

The minutes of the Fed's March policy meeting, released Tuesday, noted that some policymakers "anticipated that the effects of energy price declines and the dollar's appreciation would continue to weigh on inflation in the near term, suggesting that conditions likely would not be appropriate to begin raising rates until later in the year [after June.]"

Gundlach's take: "Clearly the Fed is cognizant of the strong dollar, and that gave the short-term yield curve a bit of a boost recently. If the dollar rises further, maybe the Fed stays on hold. It could be."

The dollar's ascent curbs exports by making them more expensive in foreign currencies and hurts U.S. corporate earnings by making their foreign revenue worth less in dollar terms. It limits inflation by making our imports cheaper in dollar terms.

"The dollar's rise has to have consequences," Gundlach said.

If the dollar weakens, the Fed "can relax, and then it would raise rates, and then the dollar will [get] stronger [again]," he explained. "It's a tug of war, so the dollar should not make much progress in the short term."

Many economists expect the Fed to raise rates in September. It has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008.

Former Treasury Secretary Larry Summers says the Fed should maintain its caution in boosting rates. The reason he feels that way: "the greater risks are on the side of [economic] slowdown and stagnation, rather than on the side of overheating and inflation," the Harvard professor told CNBC.

That risk of a slowdown was reinforced by the March jobs report, which showed that non-farm payrolls rose only 126,000 last month, the weakest showing since December 2013.

Meanwhile, the personal consumption expenditures price index climbed just 0.3 percent in the 12 months through February, far below the Fed's 2 percent target.

There's no reason for the central bank to increase rates before inflation accelerates, Summers noted. "Pre-emptive wars don't work, and pre-emptive wars on inflation would be a big mistake."

As for Gundlach, he's bullish on gold and thinks oil will continue to fall.

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The dollar's upward surge has thrown a wrench into the Federal Reserve's planning for interest rate hikes.
Gundlach, dollar, Fed, rates
Friday, 10 April 2015 07:20 AM
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