NEW YORK (TheStreet) — Federal Reserve Chair Janet Yellen should support a higher value for the dollar because, contrary to popular belief, it’s in the best interest of the United States to have a stronger currency.
Policies that weaken the dollar, like those the United States has followed since the early 1960s, may help the economy, and the labor markets in the short-run, but over the longer-run, more research is indicating that these policies can be harmful to economic productivity and consequently economic growth because the economy becomes less competitive.
Regardless, a stronger dollar is the reality today. Last Friday, the United States dollar came close to $ 1.08 for one Euro. The value of the Euro has not been this low since March 2003.
A more general picture can be drawn from the Federal Reserve’s trade weighted U.S. dollar index against major currencies. Last week the index rose above 90.0, its highest level since September 2003 when the value of the dollar was declining. The value of the dollar, according to this index, has risen by about 33 percent since its recent low of about 68.0 in April 2011.
Even with this rise, the U. S. Dollar nowhere near its previous two peaks where the index rose above 113.0 in January 2002, resulting from the federal budget surpluses overseen by Treasury Secretary Robert Rubin, and where the index climbed over 148.0 in February 1985 as a result of the tight monetary policies of Fed Chair Paul Volcker. One could argue, therefore, that there is still plenty room for the value of the dollar to rise further.
The U.S. dollar is strong because the U.S. economy is stronger than most other developed countries, which has spurred a demand for dollars. And, now seems to be the right time to support the dollar because of the weak position most other nations find themselves in.
The central bank of the United States is just about to start raising short-term interest rates, while most other central banks are loosening, which should continue to cause the value of the dollar to rise further?
The question is, just how much tightening can the Fed afford? Never has the Federal Reserve, nor, any central bank, faced the domestic situation we see today. Just navigating the next year or two is going to be full of perils. With an economic recovery in it’s 66th month, the third longest in post-World War II history, with the labor force participation ratio at a thirty-seven year low, and with over $ 2.5 trillion in excess reserves sitting on the balance sheets of commercial banks, the Fed has never faced such a complicated situation.
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