While some experts say the soaring dollar is bad for the economy and stocks, because it dampens exports and corporate earnings, former Pimco Chief Economist Paul McCulley begs to differ.
The dollar's surge to multi-year highs against a range of currencies in recent weeks represents a "success story for America," he tells CNBC
"A strong dollar is a natural consequence of America emerging from a liquidity trap whereas Europe and Japan still are stuck in a liquidity trap. So you have very different environments in the United States versus the rest of the world. And you have a very different monetary policy," McCulley notes.
"I think the dollar is in a secular bull market. I think that Europe will be stuck in a liquidity trap for a long period of time."
The dollar's strength is deflationary, as it pushes down the price of our imports. As a result, the Federal Reserve can hold off raising interest rates for longer, McCulley argues. The market consensus now has the Fed moving in September.
"For what we do every day in the marketplace, it [the strong dollar] implies a kind and gentle monetary policy for a longer period than would be the case without it," he maintains.
And McCulley notes that stocks rallying Wednesday (1.2 percent for the S&P 500) after the Fed's policy statement led economists to shift their rate-hike forecast to September from June or July.
"The dollar is strong not because the U.S. economy is booming, but because Europe and Japan are intent on crashing their currencies," he writes in a commentary.
"For now, many still seem to believe this debasement and global currency war is a rising tide that lifts all boats, but should weakness in U.S. macro data and earnings continue, this belief may be tested."
GDP growth slumped to 2.2 percent in the fourth quarter from 5 percent in the third. And economists surveyed by The Wall Street Journal predict it will only reach 2.3 percent this quarter.
"With extreme volatility in currencies, commodities, and bonds, it would seem to be only a matter of time before we witness a spillover to equities," Bilello says. "We can only imagine what volatility will ensue when [the Federal Reserve] actually raises rates."
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