Thursday, May 21, 2015

The Dollar appreciated much faster than anyone expected

Until recently, U.S. policy makers were not overly concerned about the dollar’s strength, because America’s growth prospects were stronger than in Europe and Japan. Indeed, at the beginning of the year, there was hope that U.S. domestic demand would be strong enough this year to support GDP growth of close to 3%, despite the stronger dollar. Lower oil prices and job creation, it was thought, would boost disposable income and consumption. Capital spending (outside the energy sector) and residential investment would strengthen as growth accelerated.

But things look different today, and U.S. officials’ exchange-rate jitters are becoming increasingly pronounced. The dollar appreciated much faster than anyone expected; and, as data for the first quarter of 2015 suggest, the impact on net exports, inflation, and growth has been larger and more rapid than that implied by policy makers’ statistical models. Moreover, strong domestic demand has failed to materialize; consumption growth was weak in the first quarter, and capital spending and residential investment were even weaker. -- in Project-Syndicate

Nouriel Roubini is an American professor of Economics at New York University`s Stern School of Business and chairman of RGE Roubini Global Economics

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