The US dollar has gained broadly in the past six months as the economy continues to show signs of solid growth despite headwinds from falling prices and anemic growth overseas. The dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, rose by 17 percent since August, surpassing a previous high level that was set back in 2004.
Unfortunately, the dollar rally may have been too much too fast. There are now emergent signs that a strong dollar may actually have become a problem for the economy. For example, recent industry surveys of manufacturing have shown a significant drop in export activities. The cumulative effect has shaved one full percentage point from the 4th quarter Gross Domestic Product (GDP) estimate.
And looking forward, many forecasters are expecting the strong dollar problem to continue and the growth to slow more. In fact, Barclays lowered its 1st quarter GDP forecast by 0.3 percent last week and now expects the economy to expand by 2.2 percent next year. JP Morgan also cut its estimate to a 2.5 percent rate from a 3 percent pace and warned that the previously reported advanced 4th quarter growth estimate of 2.6 percent could be revised down as low as 1.8 percent later in the month when more accurate and up-to-date export data is included.
As consequence, the recent dollar rally could dissipate as quickly as it began, particularly if the Fed is persuaded to push off the date for raising the overnight lending rate. The market is expecting the first rate hike since 2006 to take place in June. However, all bets could be off if the economy continues to slow in the coming months.
Against this backdrop, it may be prudent for individuals and businesses that need to make foreign currency payments this year to take advantage of no-cost forward contracts and consider locking in favorable rates of exchange. With a forward contract, an individual or business can lock in a rate for specified amount of funds for a future date – usually up to one year in advance – with no upfront fee and a small deposit. This can also be done in bulk; buying a block of currency and drawing down on the forward on a need basis. Forward contracts provide the means to reliably manage the cost of future international payments.
The next Fed monetary policy meeting is scheduled for March 18th. A Bloomberg survey of private economists suggests that the Fed will be inclined to wait and raise the interest rates later in the year.