NEW YORK, Nov 17: The dollar’s slide to record lows has made some investors nervous that US inflation pressures will build as a result — but such fears are misplaced because currency moves rarely pass straight through to import prices.
Analysts say the greenback’s plunge against major currencies is mainly a reflection of the market’s expectations for slower US economic growth as the housing market shrinks, a factor that should help keep a lid on price increases.
“The slower economy that people are imagining will contain the ability to raise prices and that may be why we don’t see these currency swings show up in prices that much,” said James Glassman, a senior economist at JP Morgan Chase.
The dollar has been under pressure since mid-August when problems in the credit markets started surfacing, with the euro scaling a lifetime peak of $1.4752 on Nov 9. The greenback’s decline sparked fears of a disorderly fall and a pickup in inflation.
The credit turmoil stemming from home loans to people with poor credit histories has forced the Federal Reserve to cut interest rates twice since September, raising prospects of more monetary policy easing in the near term to shore up growth.
Analysts appear unfazed by the 1.8pc jump in import prices in October, largely driven by the surge in oil costs, after 0.8pc rise the previous month.
“If you look at the prices of imported goods that Americans buy, they are not doing anything different than the prices of domestic goods. That’s even though the dollar has declined almost 20pc since 2002,” said Glassman.
“The pass-through or transmission of currency swings to price adjustments has become more and more muted.” European businesses selling in US markets appeared reluctant to pass on the impact of a stronger euro to consumers for fear of losing their market share, analysts said.
They cited a study by the Federal Reserve Bank of New York, which noted the unresponsiveness of US import prices to a depreciating dollar and which said 93pc of imports into the US were priced in dollars.
The study -- titled “Why a dollar depreciation may not close the US trade deficit” -- was published in July this year.
“The same reasons apply to inflation as well. After five years of a falling dollar, that has not boosted import prices. Why should we expect import prices to rise today or next year?” said Marc Chandler, chief global currency strategist, Brown Brothers Harriman in New York. —Reuters
