Dollar Gains Evoke Connally’s ‘Your Problem’ Rebuke: Currencies

By Liz Capo McCormick and Eshe Nelson  

Source: Ron Galella, Ltd./WireImage/Getty Images

John Connally, who served as President Richard Nixon’s Treasury chief from 1971-72,... Read More

Former Treasury Secretary John Connally summed up the U.S.’s attitude toward nations bemoaning the dollar’s gyrations in 1971 when he said “it’s our currency, but it’s your problem.” Today, the phrase is gaining new relevance with the greenback wrapping up one of its best years ever.
It’s gained versus all 31 major currencies tracked by Bloomberg, while an index of 20 emerging-market exchange rates fell this month to its lowest level in more than a decade. Nations from Mexico to India and Indonesia have intervened in markets in an attempt to prop up their currencies.
For many of those countries, whose economies are often closely tied to raw materials, the timing couldn’t be worse, coming amid a collapse in the price of commodities from oil to
copper and gold. In contrast, the U.S. maintains that a strong dollar’s good because it projects an air of economic confidence in America.
The risk is “the dollar keeps rallying and it becomes uncontrollable and that becomes a very destructive force for global markets,” David Bloom, the head of currency strategy at HSBC Holdings Plc, which does business in 74 countries and territories, said by phone from London on Dec. 18.

Lew Unconcerned

While the International Monetary Fund has boosted its U.S. economic growth forecast for 2015 to 3.1 percent from 3 percent, it cut its global outlook to 3.8 percent from 4 percent.
Current U.S. Treasury Secretary Jacob J. Lew said in Johannesburg on Oct. 29 that the strong dollar was a symptom of the strengthening economy, rather than posing a risk.
Intercontinental Exchange Inc.’s Dollar Index, which measures the U.S. currency against major peers, has jumped 12 percent this year, the most since it rose 13 percent in 2005. Such a move is rare, with annual gains of 11 percent or more happening less than 16 percent of the time since 1971.
The rally has been spurred by the Federal Reserve ending measures that expanded the money supply and setting the stage for an interest-rate increase next year, while the Bank of Japan and European Central Bank continue with their looser policies.
That policy split is boosting price swings in global financial markets which are already being roiled by Brent crude slumping below $60 a barrel for the first time since 2009. JPMorgan Chase & Co.’s Global FX Volatility Index jumped 86 percent from July’s record low, more than in any year since the 2008 financial crisis.

Fed Matters

“What the Fed does matters for the rest of the world,” Callum Henderson, the Singapore-based global head of foreign-exchange research at Standard Chartered Plc, said by phone on Dec. 18. “As the Fed raises risk-free rates, that has a knock-on effect. Some countries benefit from improved exports but it’s a negative for others.”
Indonesia and India intervened to prop up their currencies last week, while Nigeria implemented controls to prevent speculators selling the naira as it’s weakened 12 percent against the dollar this quarter, the most since 2008. Mexico’s central bank sold dollars to bolster the peso this month for the first time in more than two years.

Connally’s Rebuke

Connally, who served as President Richard Nixon’s Treasury chief from 1971-72, made his comments on the dollar as a rebuke to other countries complaining about the U.S. devaluing its currency and quitting the gold standard.
The Fed made no reference to the turmoil in Russia or other global risks that have roiled financial markets in recent weeks when it released its monetary policy statement on Dec. 17.
Russia’s ruble plunged to a new record last week, cementing its status as the biggest loser among 31 major currencies this year and only bouncing back after the central bank sold dollars and took measures to curb trading.
The dollar, meanwhile, looks set to extend its advance. Surveys of strategists by Bloomberg predict gains versus 12 of the 16 most-traded currencies by the end of 2015.
Weaker currencies may help the euro region and Japan stave off the deflation risks stalking their economies, while potentially making exports of some nations more competitive.
Still, Japanese officials are worried the yen’s almost 30 percent slide since the end of 2012 is too much, with Finance Minister Taro Aso saying Nov. 21 its decline was “too fast.”
“The only one that doesn’t care is the U.S. because it doesn’t have that much international exposure,” Steven Englander, the New York-based head of Group of 10 currency strategy at Citigroup Inc., said by phone on Dec. 11. For the U.S., “historically, the impact of the strong dollar, whether on core inflation or export buying, is pretty limited and very gradual.”