Did the Fed Just Enter the Currency Wars?

The minutes from the Federal Reserve’s meeting last month have foreign-exchange traders wondering whether Janet Yellen has joined the currency wars.

Policy makers pointed to the dollar’s rising value as “a persistent source of restraint” on exports in a surprisingly dovish set of minutes published Wednesday. The greenback fell against a broad group of its peers.

Central bankers from Europe to Australia have engaged this year in bouts of rate-cutting oneupmanship, leaving the U.S., and possibly Britain, as the only developed nations seen as likely to raise borrowing costs in 2015. The dollar climbed to its strongest in more than a decade as a result, prompting billionaire Warren Buffett and Goldman Sachs Group Inc. President Gary Cohn to question whether the Fed can now increase rates without damaging the U.S. economy.

“The Fed is finding a very subtle way to temper the enthusiasm around the risks of a sustained dollar bull market that gets out of control,” said Alessio de Longis, a macro strategist in New York at OppenheimerFunds Inc., whose division oversees $11.6 billion. “What the Fed is trying to decelerate a bit is this dollar appreciation in order to make sure that the transition to a Fed hiking policy is more gradual.”

The Bloomberg Dollar Spot Index, a gauge of performance against the euro, yen, pound and seven other major currencies, erased gains after the Fed released the account of its Jan. 27-28 meeting.

Export Drag

The greenback’s gains this year added to a 13 percent jump in the second half of 2014 that was its strongest advance since 2008, even as the U.S. economic recovery started to disappoint. The Citi Economic Surprise Index shows U.S. economic data are falling short of expectations by the most in more than two years.

Officials are inclined to keep rates near zero for longer, with many participants saying a premature rate increase might damp the economic recovery, the minutes show. Participants flagged the ascendant dollar’s negative effect on net exports, with a few pointing to the risk the currency could appreciate further.

Mitigating those dangers are low energy prices, which may have a greater-than-forecast positive impact on growth, and accommodative policy overseas that supports the international outlook, the Fed said.

De Facto Tightening

“The stronger dollar is de facto tightening,” said Greg Peters, a senior investment officer at Prudential Financial Inc.’s fixed-income unit in Newark, New Jersey, which oversees $534 billion in bonds. “It is doing much of the work for them already,” he said, adding that a June increase is not on the cards.

Central bankers from Australia to Canada to Sweden are among those implementing monetary policies to boost growth. That stimulus has weakened their exchange rates, which helps make their economies more competitive, a knock-on effect that analysts have called a currency war.

The greenback has advanced at least 4 percent against each of its 16 major peers in the last 12 months. A trade-weighted index of the U.S. currency climbed to its highest since April 2009 last month. The Bloomberg Dollar index was at 1,164.34 as of 11:42 a.m. in London, after reaching 1,174.87 on Feb. 11, the strongest closing level since its 2004 inception.

Dollar Squeeze

U.S. companies are already feeling the pinch. They’re having to learn to live with a dollar rally that doesn’t necessarily reflect a stronger economy, Goldman Sachs’s Cohn said Feb. 10. Retail sales and durable goods orders have weakened in recent months and multinationals, including Procter & Gamble Co. and DuPont Co., are already seeing the strong currency weigh on earnings.

The currency’s strength makes it “very tough” for the Fed to lift interest rates this year, Buffett, the chairman of Berkshire Hathaway Inc., said this month.

That said, consumer spending accounts for almost 70 percent of gross domestic product, while exports comprise about 13 percent.

Profit Hit

“While U.S. multinationals’ profits may have been hit, the vast majority of U.S. firms are impacted only to a very limited extent,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said by e-mail Feb. 16. “U.S. policy makers are not particularly concerned about the dollar’s strength for the simple reason that the U.S. is a consumer-led economy.”

Traders have pushed back expectations for the first U.S. rate increases since 2006. Futures contracts show an 18 percent likelihood that the Fed will raise rates to 0.5 percent or higher at its June meeting, down from 23 percent a week ago.

Those bets may again be re-evaluated next week when Yellen testifies before Congress.

“The minutes will heighten, even further, interest in what Janet Yellen says,” Shahab Jalinoos, the global head of foreign-exchange strategy at Credit Suisse Group AG in New York, said by phone. “The potential for big FX moves maybe has increased as a function of these minutes, but I wouldn’t say, in and of themselves yet, they’re enough to change the broader dollar trend.”

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