The U.S. currency has remained strong despite predictions to the contrary and a stumbling American economy.
The American economy is doing substantially better than the rest of the advanced industrial world, the New York Times
“It is quite natural,” Barry Eichengreen of the University of California, Berkeley, told the Times, “that the currency of the country whose economy is least bad should have the least worst currency.”
But with many developing economies in a tailspin, commodity prices and stock markets tumbling sharply around the world, the Times asks if a rising dollar damage a fragile economic order.
"Many economists argue it is mostly a good thing. A strong dollar should help Europe and Japan overcome their deeper economic weaknesses by making their products cheaper on world markets — an overall positive for global growth," the Times reported. The strengthening of the dollar, Olivier Blanchard, former chief economist at the International Monetary Fund, told the Times’ Eduardo Porter, “is a fundamentally healthy process.”
Eswar S. Prasad, a former head of the IMF’s China division who teaches at Cornell University, believes the dollar’s gain is benign. “The United States is the only country whose currency can appreciate like this without its economy suffering badly,” he said. “This is something of a blessing for the world.”
But there are reasons to be cautious, the Times warned. “A strong dollar will squeeze American manufacturers, which have otherwise benefited from falling energy prices and rising wages in China. That will weigh on growth in the United States and further suppress inflation, which is already well below the Fed’s target,” the Times reported.
“Today perhaps it is safe to say the dollar is driven mostly by natural forces that should reverse when growth picks up elsewhere in the world. But in this choppy world economy it would be foolhardy to ignore one of the main forces driving financial flows through history: irrationality,” the Times reported.
Meanwhile, the dollar inched down against the euro and up on the yen Wednesday after the Federal Reserve suggested a March interest rate hike remained viable amid market and economic growth worries, AFP reported.
The Fed policymakers capped a two-day meeting by leaving the benchmark federal funds rate unchanged, as expected, after an historic December rate hike.
The policy-setting Federal Open Market Committee's brief statement acknowledged the U.S. economy had slowed in late 2015 and weak inflation remained a concern, but predicted it would rise toward the 2.0 percent target in the medium term.
The FOMC said it was "closely monitoring global economic and financial developments" to assess their impact on the US economy.
"The fresh worry over global risks, such as China's slowing economy and tumbling oil prices, gave the Fed's statement a dovish tilt," said Joe Manimbo of Western Union Business Solutions.
"With the Fed having grown a bit more cautious on global developments, it depicts a higher bar to a U.S. rate hike in the months ahead," he said.
The statement also signaled "gradual" further rate increases, underlining the Fed is the only major central bank on a monetary tightening path.
Kathy Lien of BK Asset Management said that fed fund futures indicate traders do not see the central bank raising interest rates until the second half of 2016.
(Newsmax wire services contributed to this report).
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