scorecardThe US dollar will stay strong even once the Fed eases rate hikes, and the central bank's balance sheet reduction is the 'elephant in the room,' former Fed chief Alan Greenspan says
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The US dollar will stay strong even once the Fed eases rate hikes, and the central bank's balance sheet reduction is the 'elephant in the room,' former Fed chief Alan Greenspan says

Jennifer Sor   

The US dollar will stay strong even once the Fed eases rate hikes, and the central bank's balance sheet reduction is the 'elephant in the room,' former Fed chief Alan Greenspan says
Stock Market1 min read
Former Fed chief Alan Greenspan.    REUTERS
  • The dollar will stay strong even once the Fed eventually eases up on rate hikes, former Fed Chair Alan Greenspan said.
  • That's because of the "elephant in the room": the Fed reducing its balance sheet by $95 billion a month.

The US dollar will stay strong even when the Fed eventually starts easing up on rate hikes – and the reduction of the central bank's balance sheet is the "elephant in the room" driving that, according to former Fed chief Alan Greenspan.

"Even if, as some prognosticators expect, US inflation crests in the first half of 2023 and the Federal Reserve can slow or even stop the pace of rate increases, the US dollar will still have a monetary tailwind to support it," the ex-central banker said in a note published on Wednesday.

Greenspan, who is now now a senior economic adviser to Advisors Capital Management, pointed to the Fed's quantitative tightening regime, which takes money out of the financial system in order to lower inflation.

That process often goes hand-in-hand with rate hikes – and it will likely contribute to the strength of the US dollar beyond this year, even after the Fed pivots on rates, he predicted.

"Indeed, the elephant in the room with respect to continued strength in the US dollar going forward may turn out to be the $95 billion per month reduction in the Federal Reserve's balance sheet," Greenspan said.

That means the US dollar could still spell trouble for the global economy. Nobel Laureate Paul Krugman previously noted the strong dollar exacerbated inflation abroad.

On Wednesday, Greenspan noted that a strong dollar can make energy costs higher, as commodities like natural gas are largely priced in the greenback.

"Investors should be aware that while dollar strength can be a symptom of economic stresses, it can also be a cause," he warned. "Strength in the dollar has made the natural gas Europe so desperately needs that much more expensive."

Meanwhile, US companies have also reported headwinds this year due to a strong dollar affecting international sales.




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