When does a weak US dollar become a headache for the Federal Reserve?

The US dollar has lost significantly against a basket of currencies in both 2017 and 2018 (so far), details here.

In fact, the US dollar has lost over 10% against 29 currencies (for 56 countries) over the past year, details here.

The US recorded a $53.1 billion trade deficit in December 2017, the highest trade deficit since October 2008. And tentative figures released today estimate a trade deficit of $74.4 billion in January 2018, the highest trade deficit since July 2008.

A weaker currency for a nation that imports more than it exports means higher inflation which in turn (normally) means higher bond yields.

Not only does the US have higher yields than Japan, the UK or Germany; Greece (Moody’s Credit Rating: Caa2) is now paying 83 bps lower interest on 2-year bonds than the US (Moody’s Credit Rating: Aaa). Italy and Portugal which were just a few months ago regarded as a major risk to the Eurozone and the global economy have lower yields than the US on 2-year and 10-year bonds (details here).

The question to ask is – When does a weak US dollar become a headache for the Federal Reserve?

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