Winner: Fed boss Jerome Powell
“The dollar is our currency, but your problem.” This more than half-century-old quote from John Connally (1917-1993), Secretary of the Treasury under President Nixon, is highly topical. The US dollar has not been this strong in a while. And that is a problem for many other countries, especially for central bankers in East Asia – more about that later.
The dollar is rapidly gaining ground against, among others, the Korean won and the Japanese yen. The euro has also been losing against the dollar lately, tempting some traders to gamble that the dollar will be worth the same as the euro early next year.
For Jerome Powell, chairman of the Federal Reserve, the US central bank, it is mainly good news. The economy is running like a charm in the US. So good, in fact, that there is no immediate need for the Fed to lower the high interest rate of 5.5 percent. Another factor is that inflation has been higher than expected in recent months. Powell stated last week that it will take ‘longer than thought’ to contain the specter of inflation, and that an interest rate cut may not be made until the end of this year.
Despite the high interest rates, the American economy will grow by no less than 2.7 percent this year, according to the International Monetary Fund (IMF) forecasts. These are figures that Powell’s colleagues in, for example, the Netherlands (0.6 percent), Germany (0.2 percent) and Japan (0.9 percent) are jealous of.
Loser: Bank of Japan Governor Kazuo Ueda
The last time the yen was worth as little as it was asking now Twin Peaksviewers wondered who killed Laura Palmer, and celebrated Sinéad O’Connor Nothing Compares 2 U. On Thursday, 155 yen went for one dollar. The Japanese currency has not been this cheap since April 1990.
These are headaches for Kazuo Ueda, the head of Japan’s central bank. A weak yen may be beneficial for Japanese cars, electronics and other exports, making them more attractive to foreigners, but it also has disadvantages. It drives up inflation and makes foreign goods more expensive, which is unfavorable because Japan has been importing more than it has exported in recent years. The result is declining purchasing power.
Now, until recently, inflation would have been as bad for Japan as rain was for the Sahara. For decades, Japan suffered from the opposite due to its aging and frugal population: deflation, or falling prices, resulting in economic stagnation.
Recently, however, the yen has been losing ground to the dollar so quickly that Ueda is threatening to intervene if the loss becomes ‘too big to ignore’. In this light, last month he implemented the first interest rate increase in 17 years. Japanese interest rates are now even slightly above zero percent, which is so unusual in the land of the rising sun that young bankers are taking a course because they are only used to negative interest rates.
