Dollar’s surge could delay Fed decision to raise rates

Janet L. Yellen

Federal Reserve Chief Janet L. Yellen says the dollar is on policymakers’ minds.

(Chip Somodevilla, Getty Images)

The interest rate on an American home mortgage later this year could depend a lot on how many euros, yen, pesos and rupees a dollar will fetch.

The dollar’s steep ascent against many of the world’s currencies since last summer could help delay the first Federal Reserve rate hike since 2006. In turn, that could affect mortgage and other long-term rates.

Historically, the Fed officially hasn’t paid much attention to the dollar’s swings, honoring a separation of powers that goes back to the central bank’s creation: The Fed is responsible for monetary policy, while decisions about the dollar are the U.S. Treasury Department’s domain.

But under Chairwoman Janet L. Yellen, the Fed has made clear that the dollar is on policymakers’ minds as they contemplate what to do with rates.


A closely watched index of the dollar’s value against six other major currencies has shot up 21% since last June to its highest level since 2003. That is making U.S.-produced goods more expensive abroad and turning overseas earnings for many American multinational companies into fewer dollars.

The minutes of the Fed’s late-January meeting said officials expected the strong dollar to be “a persistent source of restraint on U.S. net exports.” The minutes also said that “a few participants pointed to the risk that the dollar could appreciate further.”

Yellen, in a news conference after the Fed’s mid-March meeting, said the central bank was “taking account of international developments” in its deliberations, an apparent reference to the dollar’s surge.

A few months ago, many economists expected the Fed to begin raising its benchmark short-term rate in June from near-zero levels. Now most analysts doubt that the Fed will order its first increase before fall.


“The move in the dollar has been so big they can’t ignore it,” said Ethan Harris, co-head of global economics at Bank of America Merrill Lynch. “They have to think about the shock to the economy.”

Some Wall Street firms believe that the dollar will continue to rocket as many foreign governments and central banks favor devaluation of their own currencies, an attempt to boost economic growth by slashing the cost of their exports.

Goldman Sachs & Co. has told clients that it expects the euro to be worth 95 cents a year from now, down from the current $1.09, and down from $1.37 a year ago.

But the dollar’s advance has slowed in recent weeks as U.S. economic data have weakened. The government on Friday reported that the economy created a net 126,000 jobs in March, far below expectations.

If the Fed were to raise rates, the effect could be to further stoke the dollar. That’s because higher interest rates tend to attract global investors to a country’s bonds and bank accounts, boosting demand for its currency.

What’s more, once a trend in a currency gets going, the surprise often is how far it goes as speculators pile in. Global trading in currencies is massive, exceeding $5trillion a day.

“People always underestimate the big swings,” said C. Fred Bergsten, senior fellow at the Peterson Institute for International Economics in Washington.

Don Rissmiller, chief economist at investment advisory firm Strategas Research Partners in New York, said the dollar’s strength isn’t a reason for the Fed to put off raising interest rates indefinitely.


“What it means is, yes, rates are still going up — but they’re not going up much,” Rissmiller said. He thinks that the earliest a Fed hike could come is this fall.

More important, Rissmiller said, is that the Fed’s hikes could come so slowly that its benchmark rate might not reach 2% before 2017. That could mean that long-term rates, such as on bonds and mortgages, also would be slow to rise from current levels as long as inflation stays subdued.

Long-term interest rates remain near their recent lows. The bellwether 10-year Treasury note yield was at 1.84% on Friday. It has edged up from a one-year low of 1.64% in February.

The average U.S. rate on 30-year mortgages was 3.70% last week, up slightly from a recent low of 3.59% in February.

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