Washington DC July 25 2022: The surge in the dollar this month to its strongest levels in decades has won a tacit endorsement from Washington, offering little official restraint to the currency in a notable shift from past occasions.
Congressional hearings with key policy makers including Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell have seen barely a mention of the greenback’s gains, even as it hit the highest against the yen since 1998 and strongest versus the euro since 2002.
By contrast, past episodes of dollar appreciation spurred moves by lawmakers such as a bipartisan push for a currency-oversight bill in 2013, and comments of protest from the administration of the day — most famously, when former President Donald Trump demanded the Federal Reserve help weaken the exchange rate.
The fastest US inflation rate in more than a generation means it’s different this time. Even as economists see limited help from exchange-rate appreciation in bringing consumer prices under control, policy makers have largely endorsed the strong dollar. That may continue until the American economy turns.
“It’s definitely something that we talk to the president about — he’s very interested in the dollar,” White House Council of Economic Advisers member Jared Bernstein said on Bloomberg Television July 18. “When you’re worried about inflationary pressures, a stronger dollar helps you by making your imports less expensive.”
US currency policy is housed in the Treasury Department, and Yellen hasn’t been as explicit as some others in President Joe Biden’s administration in her remarks. But she has struck a notably different chord on the greenback than during her long career at the Fed.
While serving in Fed leadership positions, including as chair, Yellen tended to highlight the downside for US growth from a strengthening dollar, and the upside from a weakening one. And when she took office as Treasury chief last year, didn’t adopt the “strong dollar policy” championed by predecessor Robert Rubin in the 1990s and reiterated — with varying degrees of support — by many of his successors.
“It’s understandable that the dollar has risen” as higher US interest rates spur capital toward the greenback, Yellen said May 18. Earlier that month she explained that, “In a way that’s part of how a tighter monetary policy works.”
Powell’s Take
For her part, Commerce Secretary Gina Raimondo said on Bloomberg Television on July 11, “I am not concerned about the dollar being as strong as it is” — highlighting that “inflation is our challenge.”
The current Fed chair told lawmakers on June 22 that the exchange rate was one of three channels through which interest-rate hikes affect the economy. Powell said the other two were asset prices — such as equity-market declines — and interest-sensitive spending including on autos.
At the same time, he also sees the impact as limited.
“The dollar has been strong, which would tend to be disinflationary — but only at the very margin,” Powell said at an economic conference in Sintra, Portugal, on June 29.
Private economists agree that the impact on the economy is marginal, at least at a time when inflation is running north of 9%. Bloomberg Economics estimates that dollar appreciation seen since mid-2021 has reduced the Fed’s preferred inflation measure by just 0.1 percentage point.
The peak effect, seen arriving next year, would still only be about 0.2 percentage point. The Fed’s preferred measure, the personal consumption expenditures price index, is currently running at 6.3%, near the highest since the early 1980s.
“Does dollar appreciation over the last year reduce the need for Federal Reserve rate hikes? As it turns out, not really. The disinflation effect is too small relative to the magnitude of the Fed’s inflation problem, and the relief would arrive too late.”Anna Wong, chief US economist
Import price growth has moderated in recent months as the dollar has appreciated, but that doesn’t necessarily mean the consumer-price effect is going to be as large, said Gregory Daco, chief economist at Ernst & Young LLP.
“The strengthening of the dollar — while it’s a good thing — is marginally not a game changer from an inflation perspective” in the current environment, Daco said. “But it does weigh to some extent on export prospects.”
For now, that may be hard to detect. The US trade deficit narrowed to its smallest reading the year in the latest monthly report, reflecting a pickup in exports of goods and services.
“It’s a small-to-minor drag on growth,” said Michael Gapen, head of US economics at Bank of America Corp.
The calculus for Washington could change if the economy slumps into a recession. A global downturn that stoked demand for dollars as a haven could be particularly problematic, according to Rob Subbaraman, head of global markets research at Nomura Holdings Inc.
“The risk is that if the dollar stays strong, it will start to do more harm than good,” Subbaraman said. That “may increase concerns in America that the dollar’s role as the world’s reserve currency may no longer serve in the best interests of the US economy.”
