Eyes on US economy, Fed likely unmoved by China devaluation

[NEW YORK] China's currency devaluation on Tuesday is unlikely to distract the US Federal Reserve from a domestic economy that appears increasingly ready for higher interest rates.

The US central bank will hope that the surprise move is not the beginning of a series of competitive devaluations that could send the dollar much higher than its slight rise on Tuesday, weakening already soft US inflation, economists and Fed watchers said.

But as it considers whether to lift rates as soon as next month, the Fed's key focus is the growing durability of the US labour market. Fed policymakers could even see China's devaluation as boosting global growth if it helps shore up a stumbling Chinese economy that has hit world commodity prices and financial markets. "I don't see this affecting the Fed decision unless it develops into something that roils markets substantially," said Peter Hooper, chief economist at Deutsche Bank Securities and a former Fed economist. "It adds a little more drag to the economy via net exports and puts a slight damper on consumer prices, but not enough to alter the course of the US economy or labor market significantly," he said.

The People's Bank of China set the yuan's peg to the dollar about two per cent lower, calling it a "one-off depreciation" that helps align the currency with others that have slipped as the Fed has prepared to tighten monetary policy.

Fed officials say the dollar's year-long rise, alongside tumbling oil prices and weaker economies abroad, has put downward pressure on stubbornly low domestic prices and has played at least some role in delaying rates "liftoff." Stanley Fischer, the Fed's vice chair, said on Monday the global disinflationary trend "bothers" the Fed. But "primarily the US economy depends on itself - not only, but to a considerable extent," he added in a television interview.

US central bankers could raise rates for the first time in nearly a decade at a Sept 16-17 meeting.

Atlanta Fed President Dennis Lockhart and other policymakers say that between now and then, data on US jobs growth, inflation, and retail sales will inform that decision, suggesting only a big shock from abroad could throw things off.

Analysts say it is more likely that the path of subsequent rate rises would hinge more on inflation and the dollar, which could react strongly to further competitive devaluations from China in response to worsening data there.

Roberto Perli, partner at economic research firm Cornerstone Macro, said Tuesday's devaluation should appreciate the dollar by 0.4 per cent given the yuan's trade-weighted effect. "The Fed is likely to think that today's move reduces the risks to the US economy, just like any other foreign easing move does," he wrote to clients. "This should at least partly offset the stronger dollar and leave the odds of a liftoff later this year, probably in September, little changed for now."

REUTERS