Bloomberg News - Is Dollar Next? Investors Reassess After Swiss Shock: Currencies

Photographer: Ron Antonelli/Bloomberg

Pedestrians walk past restaurants and shops on East 4th Street in downtown Cleveland, Ohio, U.S. A small downturn in the U.S. economy, “just enough to make people say maybe rates aren’t moving higher, the Fed is on hold -- that could take some of the sheen out of the dollar’s shine,” Greg Peters, a senior investment officer at Prudential Financial Inc.’s fixed-income business in Newark, New Jersey, said Jan. 15 by phone.

After Switzerland shocked markets by scrapping its currency cap, investors are beginning to ask whether a policy surprise may be lurking for the dollar, too.

Samson Capital Advisors LLC said the Swiss move, which sent the franc surging as much as 41 percent against the euro last week, was “a good reminder” of the risks of following the herd, just as speculators pushed bets on a dollar rally to a new high. A shock from the Federal Reserve, such as raising interest ratesless quickly than investors expect, may derail the greenback after it advanced to the highest in a decade, State Street Global Advisors Inc. warned.

“People have to be re-assessing what their positions are,” Jonathan Lewis, chief investment officer at New York-based Samson, which has $7.4 billion in assets, said by phone on Jan. 16. In the case of Switzerland, “people were betting billions of dollars on the kindness of strangers, people they’d never met, whose names they couldn’t pronounce.”

Bloomberg’s Dollar Spot Index -- which tracks the U.S. currency against the euro, yen and eight others -- is headed for a seventh straight monthly advance on the assumption the Fed will raise its zero to 0.25 percent benchmark rate in coming months. At the same time, traders expect Europe and Japan to debase their currencies by flooding markets with more cash.

Only now, after being shocked by the Swiss National Bank, some investors are asking: What if we’re wrong?

Rate Expectations

A small downturn in the U.S. economy, “just enough to make people say maybe rates aren’t moving higher, the Fed is on hold -- that could take some of the sheen out of the dollar’s shine,” Greg Peters, a senior investment officer at Prudential Financial Inc.’s fixed-income business inNewark, New Jersey, said Jan. 15 by phone. His division oversees $534 billion of bonds.

It’s the extent of the dollar positioning that’s causing angst.

Hedge funds and other large speculators pushed net wagers on the dollar strengthening versus eight major peers to a record 448,675 contracts in the week ending Jan. 13, according to the latest data from the Commodity Futures Trading Commission in Washington.

Anticipating Gains

Forecasts in Bloomberg surveys still see the U.S. currency gaining versus all except 10 of its 31 most-traded peers by year-end, after climbing against all of them in 2014.

Bloomberg’s dollar index was at 1,141.78 at 7:43 a.m. in London, after closing at 1,147.54 on Jan. 8, the highest since it started at the end of 2004. Even so, a trade-weighted measure of the greenback versus the currencies of its major trading partners remains short of its peaks in 2009, suggesting the dollar rally has further to go.

This has helped convince investors to speculate on a stronger dollar and, some say, left them vulnerable to the whims of policy makers.

“If we do have outcomes, either from the Fed that are less hawkish, or outcomes from theEuropean Central Bank that are less dovish than are expected, those two could conspire” to hurt the dollar against the euro, Collin Crownover, the Boston-based head of currency management at State Street, which oversees about $2.4 trillion, said by phone on Jan. 16.

That same day, the euro tumbled to an 11-year low of $1.1460 on speculation the ECB is preparing to announce currency-depreciating sovereign-bond purchases.

Fed ‘Patience’

There are already signs the U.S. central bank is pulling back from an imminent rate increase.

Fed officials urged “patience” on monetary policy at their December meeting, noting risks to the economy from lower oil prices and weak overseas growth. Futures contracts now show about a 50 percent chance the U.S. will raise rates to 0.5 percent or higher before October, while at the end of last year traders were betting on a September increase.

Bullish-dollar positioning may convey a sense of déjà vu among investors.

Speculators boosted positions on the franc weakening against the dollar to the highest in 1 1/2 years this month, CFTC data show, only to be burned by a 21 percent jump to a more than three-year high on Jan. 15. The franc also posted an unprecedented 23 percent rally against the euro that day after Switzerland abandoned the cap that had been in place since 2011.

The Swiss announcement was all the more unexpected because, two days earlier, SNB Vice President Jean-Pierre Danthine re-affirmed the currency peg as a “pillar of our monetary policy.” Central-bank President Thomas Jordan’s insistence that surprise was necessary only sowed more doubt in the minds of investors about their other currency positions.

“Although Fed expectations continue to be shifted back in the markets, FX probably hasn’t really focused on that,” Derek Halpenny, the London-based head of European markets research at Bank of Tokyo-Mitsubishi UFJ, said by phone Jan. 15. “That could be a catalyst for some of the demand for dollars coming off.”

To contact the reporters on this story: Rachel Evans in New York at revans43@bloomberg.net; Lananh Nguyen in New York at lnguyen35@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Paul Armstrong, Kenneth Pringle

Reuters News - IMF cuts global growth outlook, calls for accommodative policy

Labourers work at a construction site for a new commercial building in Beijing January 19, 2015.

CREDIT: REUTERS/KIM KYUNG-HOON

(Reuters) - The International Monetary Fund lowered its forecast for global economic growth in 2015, and called on Tuesday for governments and central banks to pursue accommodative monetary policies and structural reforms to support growth.

Global growth is projected at 3.5 percent for 2015 and 3.7 percent for 2016, the IMF said in its latest World Economic Outlook report, lowering its forecast by 0.3 percentage points for both years.

"New factors supporting growth, lower oil prices, but also depreciation of euro and yen, are more than offset by persistent negative forces, including the lingering legacies of the crisis and lower potential growth in many countries," Olivier Blanchard, the IMF's chief economist, said in a statement.

The IMF advised advanced economies to maintain accommodative monetary policies to avoid increasing real interest rates as cheaper oil heightens the risk of deflation.

If policy rates could not be reduced further, the IMF recommended pursuing an accommodative policy "through other means".

The United States was the lone bright spot in an otherwise gloomy report for major economies, with its projected growth raised to 3.6 percent from 3.1 percent for 2015.

The United States largely offset prospects of more weakness in the euro area, where only Spain's growth was adjusted upward.

Projections for emerging economies were also broadly cut back, with the outlook for oil exporters Russia, Nigeria and Saudi Arabia worsening the most.

The drop in world oil prices, which have fallen more than 50 percent since June, is largely the result of OPEC not cutting supplies, a decision that is unlikely to change, Blanchard said.

"We expect the decrease in price to be quite persistent," he told reporters at a news conference launching the report. "We expect some return, some increase, but surely not an increase back to levels where we were, say, six months ago."

The IMF predicts that a slowdown in China will draw a more limited policy response as authorities in Beijing will be more concerned with the risks of rapid credit and investment growth.

Slower 2015 growth in China "reflects the welcome decision by the authorities to take care some of the imbalances which are in place and the desire to reorient the economy towards consumption and away from the real estate sector and shadow banking," Blanchard said.

The IMF also cut projections for Brazil and India.

The forecasts are far rosier than World Bank predictions last week that the global economywould grow 3 percent this year and 3.3 percent in 2016.

Lower oil prices will give central banks in emerging economies leeway to delay raising benchmark interest rates, although "macroeconomic policy space to support growth remains limited," the report said.

Falling prices will also give countries a chance to reform energy subsidies and taxes, the IMF said.

The prospects of commodity importers and exporters will further diverge.

Oil exporters can draw on funds they amassed when prices were high and can further allow for substantial depreciation in their currencies to dull the economic shock of plunging prices.

The report is largely in line with remarks by IMF Managing Director Christine Lagarde last week, in which she said falling oil prices and strong U.S. growth were unlikely to make the IMF more upbeat.

The euro zone and Japan could suffer a long period of weak growth and dangerously low inflation, she said.

Both Lagarde and the report indicated that money flowing back to the U.S. as it tightens monetary policy could contribute to volatile financial markets in emerging economies.

The US Federal Reserve is widely expected to begin raising interest rates some time this year.

Bloomberg news - Euro Back in Davos Focus as First ECB Then Greece Decides

Photographer: Kostas Tsironis/Bloomberg

A video screen broadcasts the speech of Alexis Tsipras, leader of the Syriza party, at a pre-election party congress in Athens, Greece, on Jan. 3, 2015. While Tsipras has committed to keeping Greece in the euro area, the ECB has warned the country could lose financial support if its rescue program collapses

The euro-area economy is back in the cross-hairs of investors.

It’s a familiar place for the currency bloc, which spent the past five years struggling for growth, the faith of investors and even its very existence. The latest concerns, that failure to break political logjams dumps the region back into recession and crisis, are propelling the continent back up the worry list of investors, executives and policy makers heading to the World Economic Forum’s annual meeting in Davos.

A Greek election in six days may hand a slice of power to a party gunning to renegotiate the austerity on which the nation’s bailout is based, potentially serving as a preview for votes in Portugal and Spain and reviving talk of a euro exit.

Meantime, European Central Bank President Mario Draghi, the man who defused the turmoil in 2012, is trying to craft the cross-border consensus needed for full-blown quantitative easing as the threat of deflation hovers over the region and governments resist overtures to do more.

“The politics of Europe is so much more problematic even though the economics look better,” saysIan Bremmer, founder and president of the New York-based Eurasia Group. “Everywhere you look politically, bottom up, inside out, outside in, Europe is bad this year.”

False Dawn

That’s a reversal of fortune from last year when Draghi was telling Davos delegates that he anticipated signs of a “dramatic” improvement in his economy’s health, and German Finance Minister Wolfgang Schaeuble declared the crisis over.

For a sign of the renewed concern, look no further than the euro, which turned 16 years of age this month and is trading at its lowest in more than a decade against the dollar.

The currency’s downward slide was compounded by the Swiss National Bank’s surprise decision on Jan. 15 to scrap its currency cap on the franc, sparking turmoil in markets. The euro fell more than 3 percent last week, the biggest weekly drop in more than two years.

The first of this year’s election battles will be in Greece, the euro-zone’s original problem child. Voting takes place Jan. 25 with Syriza leading in opinion polls after five years of fiscal austerity and with unemployment still north of 25 percent. The party is pledging to ease the budget squeeze on which international aid depends and seek a writedown on some of the country’s debt.

Collision Course

That would put it on a collision course with the so-called troika of creditors including the ECB, which have kept the country afloat with 240 billion euros ($277 billion) of loans pledged since 2010.

While Syriza leader Alexis Tsipras has committed to keeping Greece in the euro area, the ECB has warned the country could lose financial support if its rescue program collapses. Some in Germanyhave also expressed a belief that a departure of Greece would now be manageable, althoughChancellor Angela Merkel wants it to remain.

There are some reasons for confidence that there won’t be spillover in financial markets if Greece does bail. Aid programs are now in place to defend stressed markets and state finances across the bloc are in better shape, with bond yields declining to records in Italy and Spain even amid Grexit speculation.

Signaling comfort with a smaller currency bloc may still be a bluff nobody wants to call for fear investors would then turn their sights on the likes of Portugal, Ireland, Spain and perhaps even Italy.

The idea that a Greek exit would be manageable “is a dangerous game to play,” said Laura Tyson, a professor at the University of California, Berkeley, and a former adviser to U.S. President Bill Clinton.

Spanish Concerns

Even if Greece stays, the rejection of the traditional political class could still spread. While bailed-out Portugal holds an election in October, it is Spain that’s drawing concern from investors.

Home to the euro region’s second-highest unemployment rate at 24 percent, it votes at year’s end with the Podemos party outpolling rivals on promises to increase public spending and impose losses on the holders of about 1 trillion euros of government debt.

“These elections could show a shift with respect to European integration as the electoral balance between the centre-right and the center-left is abandoned in favour of new ‘protest’ parties,” saidElga Bartsch, chief European economist at Morgan Stanley in London.

While not subject to imminent elections, French President Francois Hollande is already campaigning, having pledged to step down after one term unless unemployment falls from 10.5 percent. He is being squeezed by Marine Le Pen’s National Front with its denunciations of foreigners and the euro.

Presidential Vacancy

Meantime, Italian Prime Minister Matteo Renzi faces pressure to revive an economy set to shrink for a third year in 2014. Renzi, who will meet Merkel this week, must also find a new Italian president, a position whose clout grew during the debt crisis because of the head of state’s role as a mediator in the country’s politics.

For Anne Richards, chief investment officer at Aberdeen Asset Management Plc, electoral anger comes after Europe dodged it on the streets at the height of its debt turmoil.

“It took time for the economic pain to see its way through to the ballot box,” said Richards. “We’re on the cusp of another financial crisis.”

If it wasn’t for the politics, the euro-area economy would stand to be doing better this year, according to Stephanie Flanders, chief market strategist for Europe at JPMorgan Asset Management in London.

The ECB has cut its key interest rate to a record low and started buying private-sector assets, fiscal austerity is easing, the weaker euro may help export competitiveness and oil is extending its 50 percent slump from a June peak. Banks are even extending credit more.

QE Primed

“There are reasons to feel less gloomy about the euro zone than a year ago,” said Flanders. “But the politics isn’t looking calm.”

Politics is also playing a role in the ECB’s decision-making as it appears primed to announce on Jan. 22 that it will buy government bonds for the first time, six years after the U.S. Federal Reserve began doing so. Adding to the urgency, consumer prices fell an annual 0.2 percent in December, the first decline in more than five years.

The reason the ECB hasn’t conducted quantitative easing sooner “must be entirely politics as I cannot imagine an economist thinking this,” said Nobel laureate Christopher Pissarides, a professor at the London School of Economics.

The main obstacle is Germany, where some coalition lawmakers have joined Bundesbank President Jens Weidmann in warning against QE because it risks pushing the ECB into fiscal policy and encouraging governments to foot-drag on revamping their economies or run up fresh debts.

Legal Questions

“There’s a whole row of economic reasons that speak against government-bond purchases, even before you consider the legal question of whether they’re compatible with the ban on monetary financing,” Weidmann said last month.

Keen not to alienate the euro area’s biggest economy and so jeopardize the ECB’s credibility, Draghi has conducted a charm offensive. Rare interviews have been granted to German media to tackle concerns he’s taking unwarranted risks, giving governments a free pass and penalizing savers. He’s made the point himself that the ECB alone can’t revive the region.

At the heart of his case is that the ECB’s sole mandate is to keep inflation just below 2 percent in the medium term and that goal is clearly being missed. He caught a break last week when the bond-buying plan he designed in 2012 to save the euro won a key legal endorsement from a top adviser to the European Court of Justice.

To forge as strong a consensus as he can on the ECB’s Governing Council, Draghi may need to limit the quantity and the quality of bonds purchased and have national central banks accept the risk of losses.

“The ECB’s well aware that to get a really big impact on growth you need structural reforms,” said Anatoli Annenkov, an economist at Societe Generale SA in London. “But that doesn’t exclude them from doing their job as they have a mandate.”

To contact the reporters on this story: Simon Kennedy in Paris at skennedy4@bloomberg.net; Stefan Riecher in Frankfurt at sriecher@bloomberg.net

BBC News - Swiss franc soars as Switzerland abandons euro cap

The Swiss franc soared as much as 30% in chaotic trade after the central bank abandoned the cap on the currency's value against the euro.

The Swiss National Bank (SNB) said the cap, introduced in September 2011, was no longer justified.

It also cut a key interest rate from -0.25% to -0.75%, raising the amount investors pay to hold Swiss deposits.

The International Monetary Fund's head, Christine Lagarde, called the move "a bit of a surprise".

She said she was also surprised that the governor of the Swiss National Bank had not contacted her, and said she hoped he had communicated the plan to his fellow central bank governors.

Following the SNB move the euro went from buying 1.20 francs to buying just 0.8052, but it later recovered to buy 1.04.

Swiss shares closed down 9% and stock markets around Europe fell with investors buying "safe haven" assets such as gold and German bonds.

Many investors believe that with the franc so strong Swiss companies will struggle to maintain export levels.

Watchmaker Swatch saw its share price slump 15%. Swatch chief executive Nick Hayek called the decision "a tsunami" for Switzerland's economy.

Mark Haefele, chief investment officer of Swiss bank UBS, estimated that the move would cost Swiss exporters close to 5bn Swiss francs (£3.3bn), equivalent to 0.7% of Swiss economic output.

One trader described trading after the unexpected announcement as "carnage".

While the Swiss franc was held at 1.20 to the euro it had tracked the euro's fall against the dollar.

Watch the reaction: Swatch chief executive Nick Hayek called the SNB decision "a tsunami" for Switzerland's economy

ECB action

Many believe the euro will fall even further if the European Central Bank (ECB) starts quantitative easing, buying bonds to push cash into the eurozone banking system to stimulate a recovery.

Chris Beauchamp, market analyst at IG said: "My initial reaction was that it is a sign the ECB is about to do something, which makes it odd that the reaction has been so negative across European stocks.

Safe haven - gold prices rose as the SNB removed the cap on the Swiss franc's euro exchange rate

"However, it's not every day that a central bank pulls the rug out from underneath something in such a massive way, and clearly people are worried that there's something bigger afoot."

Keeping the franc at 1.20 to the euro had became increasingly expensive for the SNB as it sold its own currency and bought up euros, sterling, US and Canadian dollars and yen, usually in the form of government bonds.

SNB foreign currency reserves have more than doubled since the cap was started in 2011 making it one of the five largest holders of foreign reserves in the world.

Analysis: Linda Yueh, chief Business Correspondent

In a statement explaining its policy, the SNB points to divergence among major economies; in particular, the weakening euro which has hit about the lowest level since its inception.

With anticipated cash injections by the ECB, the euro is expected to depreciate more against the US dollar and as the franc is pegged to the euro, the Swiss franc is weakening versus the dollar too.

So, they conclude that there is no longer "exceptional overvaluation" of the Swiss franc that justified the minimum exchange rate.

But, the reaction from markets is to push up the value of the franc since the appreciation pressures are still there.

Reuters News - Exclusive: U.S. lawmakers push ahead on Iran sanctions - senior senator

U.S. Senator Bob Corker (R-TN) speaks with reporters after Democratic and Republican party policy luncheons at the U.S. Capitol in Washington January 7, 2015.

CREDIT: REUTERS/JONATHAN ERNS

(Reuters) - Republican and Democratic U.S. lawmakers will press ahead with a plan for more sanctions on Iran, the chairman of the Senate Foreign Relations Committee said on Wednesday, despite White House warnings that they risked derailing nuclear talks.

Lawmakers, who say they fear Obama administration negotiators may not take a hard enough line with Tehran, are also at work on a separate bill to have Congress approve any final agreement on Iran's nuclear program, Senator Bob Corker, the chairman, told Reuters in an interview.

"There's continual efforts to try to figure out a way for Congress to play a role to strengthen whatever final deal may occur," the Tennessee Republican senator said.

Republican Senator Mark Kirk and Democratic Senator Robert Menendez are finalizing a bill for tougher sanctions on Iran if there is no final nuclear deal by June 30.

The Senate Banking Committee is due to hold a hearing on Iransanctions on Tuesday, said Corker, a member also of that panel.

Kirk and Menendez introduced a sanctions bill in December 2013, but it did not come up for a vote in the Senate, then controlled by President Barack Obama's fellow Democrats, who lost control of the chamber because of big losses in November elections.

The White House has insisted passage of a sanctions bill now - even one that would impose new restrictions only if there is no deal by the deadline - could prompt Iran to back out of the nuclear talks with six world powers.

Although Republicans now hold a 54-46 seat majority in the Senate, Corker said he did not know if there would be enough votes - 67 - needed in the Senate to override an Obama veto of any Iran legislation.

ISLAMIC STATE CAMPAIGN

Corker also said Republicans were open to giving Obama discretion in how to conduct the campaign against Islamic State militants, if he were to seek a formal authorization for the use of military force against them.

But they want the White House to provide them with a plan and the administration is still in the very early stages of laying the groundwork with Congress for any legislation.

Obama launched an air campaign against Islamic State fighters in Iraq and Syria in August and is deploying up to 3,000 military personnel in Iraq to train and support local forces. He adopted a go-slow approach to the issue of formal authorization for the campaign last year.

"It's very possible that over the next couple weeks we actually are able to have some language from them (the Obama administration), which is an important first step in the process," Corker said.

The Obama administration may be closer to congressional Republicans than Democrats on the issue of the military campaign. Many Democrats want any authorization to bar sending in U.S. combat troops - "boots on the ground" - but Republicans generally agree that it is better not to restrict military commanders.

"Republicans lean towards authorizing the president to deal with ISIS in an appropriate way. And generally speaking, Democrats want to see limitations on that," Corker said.

HEARINGS ON CUBA

Corker promised "robust" committee hearings in coming weeks on the administration's December announcement it would seek to normalize U.S. relations with Cuba.

"All of us are going to know a lot about the Cuba situation probably by the end of February," he added.

The news of Obama's Cuba policy shift infuriated hardline members of Congress - led by Cuban-American Republicans - who vehemently oppose easing restrictions on trade or improving relations with the island nation's Communist government.

Corker said he had yet to take a position on the issue, although he said he did not think the 53-year-long Cuban embargo had been effective.

(Reporting by Patricia Zengerle; Editing by Howard Goller)

BBC News - World Bank cuts global growth forecast

The World Bank has cut its global growth forecast, warning the US alone cannot drive an economic recovery.

Cheaper oil creates economic "winners and losers" says the World Bank

In its bi-annual report, the Bank predicted global growth of 3% this year and 3.3% next year, below its June forecast of 3.4% and 3.5% respectively.

"The global economy is running on a single engine...The American one. This does not make for a rosy outlook," chief economist Kaushik Basu warned.

However, it said lower oil prices would benefit some countries.

"The lower oil price, which is expected to persist through 2015, is lowering inflation worldwide and is likely to delay interest rate hikes in rich countries," said Mr Basu.

"This creates a window of opportunity for oil-importing countries, such as China and India; we expect India's growth to rise to 7% by 2016," he added.

However, the Bank warned that lower oil prices would hurt growth in countries which export oil, such as Russia, weighing on its global growth predicitions.

The World Bank expects the Russian economy to contract by 2.9% this year, and to grow just 0.1% in 2016.

'Sputtering' eurozone

In contrast, it said economic activity in the US and the UK was "gathering momentum" as interest rates remain low.

But it said the lingering "legacies of the financial crisis' meant the recovery had been "sputtering" in the eurozone and Japan.

The Bank warned low inflation could persist in the eurozone, and forecast growth of 1.1% in 2015, rising to 1.6% in 2016-17. In Japan, it expects growth to rise to 1.2% in 2015 and 1.6% in 2016.

"The gobal economy is at a disconcerting juncture," Mr Basu added.

Analysis by Andrew Walker, BBC World Service Economics correspondent:

We still can't really get away from the lingering after-effects of the international financial crisis.

Yes, the World Bank predicts slightly stronger growth for the global economy and for the developing world this year.

But it is still a "slow moving" recovery and there are risks aplenty, risks that could mean things turn out worse than the main forecast.

The first on the Bank's list is financial market volatility, which could increase borrowing costs for developing countries.

There is also the possibility that global trade, which has grown weakly since the crisis, could face a further setback if the eurozone or Japan were to slip into a prolonged period of stagnation or deflation.

And there's China and the danger posed by what the report calls the country's "financial vulnerabilities" - meaning debts.

It describes a disorderly slowdown in China as a low probability event, but clearly enough of a worry that it needs to be mentioned.

Bloomberg News - Oil’s Slide Risks Becoming Too Much of a Good Thing for Economy

The slide in oil prices may be coming too fast to provide the traditional fillip for the world economy.

Last year’s 50 percent plunge in Brent crude from its June peak prompted most economists to predict a boost to global growth as it bolsters consumers’ spending power, echoing effects from declines in the 1980s and 1990s. Now that the fall has extended another 21 percent barely two weeks into 2015, it risks not being as positive as some first imagined.

A disorderly drop in energy and commodity prices was the first item highlighted last month in a report on the ten things that could go wrong in 2015 by Rob Carnell, chief international economist at ING Groep NV in London.

“What at first seemed to be a good news story for 2015 has rapidly shown that whilst a little of what you want is good for you, you can definitely have too much of a good thing,” wrote Carnell, who formerly worked for the U.K. Treasury.

One reason both for oil’s decline and why it may not be a strong a lift for global growth as it once was is the U.S.’s rise as an energy producer.

That means the fuel’s fall may be so quick that it will result in the postponing or cancellation of energy investment projects that brake the economy, according to Carnell.

Temporary Windfall

U.S. households may see their windfall from lower oil prices as temporary and hold back from spending all of it, which would fail to “offset the substantial decline in investment in energy production that seems likely to follow,” Carnell said in the report. “In time, such negative effects may be subsumed by stronger consumer spending and non-energy investment, but for 2015 it may not be so clear.”

JPMorgan Chase & Co. economist Robert Mellman is also questioning how oil impacts economies these days even as he and colleagues estimate it should mean international gross domestic product will be 0.5 percent higher than otherwise.

Oil’s fall and the dollar’s recent rise risk combining to slow inflation, which typically shifts income from companies to households, according to New York-based Mellman.

“Lower inflation tends to reduce growth of nominal GDP and corporate revenues relative to growth of labor and other costs,” he said in a Jan. 9 report. “The result is a squeeze on profit margins,” particularly for trade-sensitive industries such as manufacturing that are affected by dollar appreciation.

Profit Forecasts

The pinch is already being felt. Forecasts for first-quarter profits in the Standard & Poor’s 500 (SPX) Index have fallen by 6.4 percentage points from three months ago, the biggest decrease since 2009, according to more than 6,000 analyst estimates compiled by Bloomberg News yesterday.

That may mean that the shift in income to consumers from companies is too sharp and ends up hurting the U.S., reducing its ability to lift demand elsewhere, according to JPMorgan.

JPMorgan economists already estimate that profits from domestic operations fell last quarter and are likely to do so again in the first three months of this year. Import volumes also cooled in the second half of 2014.

Meantime, Bank of America Corp. economist Emanuella Enenajor said Jan. 9 that if oil averages $50 a barrel this year, energy sector capital expenditure could plunge 40 percent in the U.S. Business confidence could also take a hit from fears of disinflation and the cheaper oil becomes the more consumers may save of the windfall.

“It’s likely that the incremental benefit to the economy diminishes as the oil price continues to fall,” she said.

Crude’s drop also risks imposing falling prices on more economies. According to an Oxford Economics Ltd., oil at $50 a barrel would mean negative inflation in 18 countries this year rather than just seven were it at $70.

To be sure, UBS AG economist Maury Harris yesterday noted that the oil and gas extraction sector still accounts for less than 2 percent of U.S. gross domestic product on a nominal basis and that the oil and natural industry is responsible for just 0.4 percent of non-farm payrolls. He still expects the U.S. to grow 3.1 percent this year.

While JPMorgan says similar rotations in income in 1986 and 1998 mean global growth should still do well, they note such expectations are tempered by the fact that there is less room this time for central banks to ease monetary policy in concert with oil’s drop.

To contact the reporter on this story: Simon Kennedy in London at skennedy4@bloomberg.net