Dollar-Euro Parity Poses Potential Problem for Fed's Rate Hike Plan
The dollar continues to gain strength, but if it reaches parity with the euro, a December rate hike from the Federal Reserve could be off the table, according to Craig Erlam, a senior market analyst at Oanda.
Erlam, based in London, described the dollar's rise relative to the European common currency as a challenge for the Fed. "The dollar hitting parity with the euro could possibly prevent the Fed from raising in December," he said, "though I expect parity to be reached later in December." The Fed's next two-day policy meeting wraps up on Dec. 16.
The euro was down to $1.069 against the dollar, a nearly 6% decline over the past month.
"The U.S. economy is recovering strongly, the unemployment rate is at 5% -- the Fed has to look at raising interest rates and can't just focus on the strength of the dollar," he said. 'The U.S. economy will adapt to a stronger dollar -- you can't just focus monetary policy on the strength of your currency.'
According to the minutes of the Fed's October statement, most FOMC participants expected economic conditions necessary for a liftoff from crisis-era interest rates "could well be met" by its December meeting.
A rate hike could add even more strength to the dollar, especially with the European Central Bank continuing -- and potentially even expanding -- its monetary stimulus, which weakens the euro. Some analysts, though, say the markets have already priced these factors in. The ECB could decide to boost its eurozone stimulus program when it meets on Dec. 3.
While the possibility of euro/dollar parity is present, Erlam doesn't think that would be enough to move the Fed off course for a December liftoff. If the Fed took parity as a reason to postpone again, "then this whole message of 'We don't tailor our monetary policy to the strength of our currency' would clearly be nonsense, and [the Fed] would be basically breaking its own code of conduct."