Strong Dollar Seen Hurting US Outlook and Even Tilting Fed Path

A strong dollar is likely to weigh negatively on the US economic outlook and could alter how high the Federal Reserve ultimately raises interest rates, economists surveyed by Bloomberg said.

Nearly half of the economists said that international fallout from a strong dollar was either somewhat likely or very likely to spill back to the US over the next 18 months and affect monetary policy. Just 28% saw the currency strength as unlikely to have any impact.

The dollar has risen about 13% this year against other major currencies amid geopolitical tensions following Russia’s invasion of Ukraine and as the Fed aggressively raises interest rates to fight an inflation rate that’s at a 40-year high. The survey of 40 economists was conducted Oct. 21-26.

Officials are expected to continue their campaign with another 75 basis-point increase on Wednesday. Their last forecast showed rates reaching 4.4% by year end from a current target range of 3% to 3.25%, and nudging to 4.6% in 2023.

Chair Jerome Powell and his colleagues are trying to cool the economy and ease price pressures by deliberately tightening US financial conditions, of which the value of the dollar is an important component. A stronger dollar tends to dampen inflation by reducing the costs of imports and lowering domestic production as it raises export prices.