Declining dollar little inflation threat for now

By Lucia Mutikani - Analysis

NEW YORK (Reuters) - The dollar's slide to record lows has made some investors nervous that U.S. inflation pressures will build as a result -- but such fears are misplaced because currency moves rarely pass straight through to import prices.

Analysts say the greenback's plunge against major currencies is mainly a reflection of the market's expectations for slower U.S. economic growth as the housing market shrinks, a factor that should help keep a lid on price increases.

"The slower economy that people are imagining will contain the ability to raise prices and that may be why we don't see these currency swings show up in prices that much," said James Glassman, a senior economist at JP Morgan Chase.

The dollar has been under pressure since mid-August when problems in the credit markets started surfacing, with the euro scaling a lifetime peak of $1.4752 on November 9. The greenback's decline sparked fears of a disorderly fall and a pickup in inflation.

The credit turmoil stemming from home loans to people with poor credit histories has forced the Federal Reserve to cut interest rates twice since September, raising prospects of more monetary policy easing in the near term to shore up growth.

Analysts appear unfazed by the 1.8 percent jump in import prices in October, largely driven by the surge in oil costs, after an 0.8 percent rise the previous month.

"If you look at the prices of imported goods that Americans buy, they are not doing anything different than the prices of domestic goods. That's even though the dollar has declined almost 20 percent since 2002," said Glassman.

"The pass-through or transmission of currency swings to price adjustments has become more and more muted."

European businesses selling in U.S. markets appeared reluctant to pass on the impact of a stronger euro to consumers for fear of losing their market share, analysts said.

LIMITED PASS-THROUGH TO IMPORT PRICES

They cited a study by the Federal Reserve Bank of New York, which noted the unresponsiveness of U.S. import prices to a depreciating dollar and which said 93 percent of imports into the United States were priced in dollars.

The study -- titled "Why a dollar depreciation may not close the U.S. trade deficit" -- was published in July this year.

"The same reasons apply to inflation as well. After five years of a falling dollar, that has not boosted import prices. Why should we expect import prices to rise today or next year?" said Marc Chandler, chief global currency strategist, Brown Brothers Harriman in New York.

Fed Chairman Ben Bernanke told Congress last week that the falling dollar had potential to raise import prices and contribute to inflation. Analysts said Bernanke was only displaying the Fed's anti-inflation credentials.

"The dollar could impact inflation, but the evidence so far suggests it has not. If the falling dollar causes inflation, how come the Japanese yen, which is near 20-year lows on a trade-weighted basis, has deflation?" said Chandler.