Fed Needs to Move Slowly

A strong dollar is a powerful dampener of U.S. inflation. Over the last twelve months, the dollar’s trade-weighted exchange rate rose 13.3 percent – marking 14.4 percent and 13 percent increases against the euro and the yen, respectively. These two currencies are legal tenders in one-fifth of the world economy, which is a destination for 18 percent of America’s foreign trade.

How important is all that in the Federal Reserve’s policy deliberations? There are two parts to the answer.  First, the dollar’s exchange rate operates directly on U.S. exports and imports, which represent nearly one-third of the economy.

Second, that impact is much wider. Acting as a de facto import subsidy, the rising dollar puts downward cost pressures on American import-competing industries. At the moment, these pressures are quite strong. Driven by the weakening energy market, the U.S. import prices declined 5.5 percent last year, showing the largest drop since 2008. Nonfuel import prices were also falling toward the end of 2014, but remained stable for the year as a whole.

CNBC

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.