Federal Reserve Chairman Ben S. Bernanke is proving critics wrong as his stimulus program’s weight on the dollar boosts U.S. growth without slowing a global expansion or diminishing demand for America’s financial assets.
The Fed’s $600 billion injection into the U.S. financial system has helped weaken the dollar 8.5 percent against a basket of six developed-nation currencies since Aug. 27, when Bernanke suggested more stimulus may be needed. U.S. exports have risen each month since to a record $167.7 billion in January, Commerce Department data show. Caterpillar Inc. boosted foreign sales by about a third last year, and Honeywell International Inc. increased exports.
While the policy sparked complaints from officials in Germany, China and Brazil that the U.S. was starting a competitive devaluation of the dollar, hurting their economies, Bernanke responded by saying the Fed must focus on domestic growth. Barclays Capital estimates the pace of global expansion will stay above 4 percent for a second year in 2011. Concerns that U.S. inflation would surge and foreign investors would shun dollar-denominated assets haven’t materialized.
“One of the things the critics of the Fed don’t seem to recognize is having a weak currency is absolutely normal when you’re coming out of a banking and a credit crisis,” Ethan Harris, head of developed-markets economic research at Bank of America Merrill Lynch, said in an interview from his New York office. “It’s the way countries heal their wounds.”
U.S. Rebound
The U.S. economy expanded at a 3.1 percent annual rate in the fourth quarter, Commerce Department figures showed March 25, and it may grow 3 percent this year, the most since 2005, according to the median estimate of 65 analysts in a Bloomberg News survey. The economy shrank for 18 months through June 2009 in the worst financial crisis since the Great Depression, according to data from the National Bureau of Economic Research.
The economies of Brazil, Russia, India and China, known as the BRICs, may expand 7.7 percent this year on average, compared with 8.8 percent in 2010, strategists at London-based Barclays said in an April 1 report. Germany’s will expand 2.65 percent this year, according to the median estimate of 16 economists in a Bloomberg News survey.
At $14.1 trillion, the U.S. economy is about 13 percent larger than that of Brazil, Russia, India, China and Germany combined, World Bank data show. That means a stronger U.S. economy may buoy those of its trade partners. America purchases 20 percent of China’s exports, the U.S. government says, and is the second biggest buyer of German and Brazilian goods.
Dollar Stumbles
IntercontinentalExchange Inc.’s Dollar Index, used to track the currency against six major U.S. trading partners, rose 0.1 percent today to 75.89. The move followed a 0.5 percent drop last week and pared its decline since the end of August to 8.8 percent. The greenback gained 0.2 percent today versus the euro to $1.4217 and was little changed against the yen at 84.
America’s currency may be poised to rebound, appreciating to $1.35 per euro by the end of the year, according to the median estimate of 47 analysts in a Bloomberg News survey. It will gain to 88 per yen, a separate poll shows.
Even though the Fed has flooded the financial system with cash, the dollar still made up 61.4 percent of global foreign exchange reserves as of the fourth quarter of 2010, little changed from the start of last year, the International Monetary Fund said March 31.
Foreign holdings of U.S. Treasuries have risen every month since April 2009, reaching a record $4.45 trillion in January, or 49 percent of the $9.05 trillion of the total marketable Treasury debt outstanding, according to data compiled by the Treasury Department.
‘Currency War’
The Fed’s so-called quantitative easing program, dubbed QE2 by analysts and investors because it followed an earlier round of $1.7 trillion in bond purchases in 2009 and the first quarter of 2010, was criticized by officials around the world.
Chinese Premier Wen Jiabao said that the policy would foster financial instability and asset bubbles. Six days after the Fed suggested at its Sept. 21 meeting that it was ready to start buying bonds, Brazilian Finance Minister Guido Mantega said governments were engaging in a “currency war.” German Finance Minister Wolfgang Schaeuble called the asset-purchase program “clueless” on Nov. 5 and suggested it was designed to erode the value of the U.S. dollar.
Brazil has tried and so far failed to keep its currency from appreciating. Mantega has tripled a tax on foreign investors’ fixed-income purchases to 6 percent and bought dollars in the spot market as part of an effort to stem a 44 percent increase in the real since the end of 2008.
Currency Controls
Colombia’s Banco de la Republica said Feb. 25 it will extend daily dollar purchases in the local market for at least three more months to limit the peso’s gains. South Korea restored taxes on foreigners’ bond holdings and tightened limits on currency derivatives, seeking to damp capital flows after the central bank raised borrowing costs twice last year.
“You’re not going to be able to fight it if the terms of trade are moving so much in your direction,” said Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York, referring to currency appreciation. “If you try and oppose it, you end up with a situation like China, where you have a lot of reserves and you end up with asset market inflation.”
Some domestic investors are also predicting dollar weakness. Billionaire Warren Buffett said March 25 that investors should avoid long-term fixed-income bets in U.S. dollars because the currency’s purchasing power will decline. Bill Gross, who runs the $237 billion Total Return Fund at Pacific Investment Management Co. in Newport Beach, California, said he has eliminated U.S. government-related debt from the fund. Pimco is the world’s biggest manager of bond funds.
End in Sight
The dollar has also weakened on speculation the Fed will lag behind other developed-nation central banks in tightening monetary policy. The European Central Bank signaled it will raise its benchmark rate this week for the first time since the financial crisis, following those of Canada, Australia and Sweden. The Fed won’t raise its lending rate until 2012, according to the median estimate of 59 economists in a Bloomberg News survey.
The Fed is likely to halt its record monetary stimulus when it completes the $600 billion of bond purchases, which may cause interest rates and Treasury yields to rise and the dollar to strengthen, according to John Lonski, chief economist at Moody’s Capital Markets Group in New York.
‘Good Spot’
“If the Fed ends its program in June, then some investors might feel more comfortable with the idea that the Fed’s zero interest rate policy will not be with us indefinitely,” Lonski said. “Higher short-term rates could provide a bid to the dollar exchange rate.” The Fed has kept its benchmark interest rate near zero since December 2008.
In the meantime, America’s exports have jumped from $153.6 billion in August, and President Barack Obama said in January that the U.S. was on course to meet his goal of doubling annual foreign sales to more than $3 trillion by 2015.
“A weaker dollar usually helps American companies” and “we’re kind of at a good spot right now,” David Cote, chief executive officer of Morris Township, New Jersey-based Honeywell, said last week in an interview for Bloomberg Television’s “Conversations with Judy Woodruff.”
Sales from exports at Honeywell, which makes car and aircraft parts, totaled $3.66 billion last year, up from $3.59 billion in 2009, according to the company’s annual report. Cote said he “would prefer” the dollar not weaken further as it can’t be “steadily weakening” and still maintain its status as the world’s reserve currency. About 11 percent of Honeywell’s revenue comes from exports.
Stock Gains
Caterpillar, based in Peoria, Illinois, the world’s largest maker of construction equipment, posted exports of $13.4 billion last year, compared with a “little over” $10 billion in 2009, Jim Dugan, a company spokesman, said in an interview.
Rising earnings have propelled the Standard & Poor’s 500 Index to a gain of 13.1 percent over the past 12 months, better than the 10.7 percent jump for the MSCI World Index of stocks.
Neither a rising equity market nor the extra dollars sloshing around the financial system has sparked inflation. The core personal consumption expenditure index, the Fed’s preferred inflation gauge, rose 0.9 percent in February from a year earlier, below the average gain of 1.9 percent over the past decade, the government said March 28.
“There was a need to provide stimulus to the U.S. economy to avoid a negative downward spiral,” said Jens Nordvig, a managing director of currency research in New York at Nomura Holdings Inc. “The Fed achieved that and that’s in everybody’s interest.”
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