For a rough-and-ready guide to the dollar’s impact on the US economy, have a glance on Google Trends at the frequency of news headlines containing the term “strong dollar” over the past 12 months.

After some minor peaks at the end of 2014, there is a big spike at the end of January, and an even bigger one in mid-March. Then it drops sharply in April and bumps along through the summer.

The dollar’s imprint on the mindset of US policymakers, politicians and business is large and deep. At the time of those spikes, its strength seemed to mirror the virility of the US economy which in turn fuelled the argument for the Federal Reserve raising interest rates.

As US Treasury Secretary Jack Lew said in January: “I have been consistent in saying . . . that a strong dollar is good for the United States.”

The dollar is not as strong as it was. But as the Fed meets next week to address the most urgent issue in the markets, when to raise rates, the dollar dominates its attention.

That is because its focus has shifted from worrying about the impact of a strong dollar on the US economy to its impact on the rest of the world.

The dollar is well off the highs of those first-quarter spikes. Those highs, when the dollar was inching close to parity with the euro, probably went too far, says Matthew Cobon, fund manager at Columbia Threadneedle.

It was “the perfect storm” of confidence in the US economy allied to monetary easing by the European Central Bank, and as a consequence, the dollar “overshot where you’d put a band around fair value”.

Dollar strength gave the Fed pause for thought, worried about the impact on US exporters. The US corporate earnings season was full of headlines about the negative impact of the strong dollar on the likes of Nike, Johnson & Johnson and Procter & Gamble.

Logic suggests that, now that the dollar is weaker, those concerns should ease, giving the Fed room to hike.

Not so fast. For the Fed, reasons not to hike have trumped reasons to do so. Reason one — the weakening dollar may be a reflection of a weakening US economy, where inflation has stubbornly kept below target.

Reason two — weaker though it now is, the dollar remains strong enough to have a serious impact on other parts of the world, specifically emerging markets as capital flows back to the US and China moves to devalue the renminbi.

Which brings us to reason three — how EM weakness might affect the US, keeping inflation low and roiling equity markets.

chart: References to term

“The Fed is looking at how ultimately the impact of the dollar on the rest of the world might feed back to the US through financial market channels or directly through a much weaker global economy,” says Steven Englander of Citigroup.

As Paul Lambert at Insight Investment sees it, the problem for the Fed is not so much that the US economy is less strong than it was but that “much of the rest of the world is certainly weak”.

One indicator of this is how the dollar has traded against different currency groups. In the spring it was omnipotent, scattering all its forex rivals to the winds.

But while it has continued to engulf EM currencies, it has weakened against some of the weightier peers, specifically the euro and the yen.

That may in part be related to currency positions, as carry trades are unwound. Nonetheless, says Mr Cobon, the market appears less willing than it was pre-summer to rush to the dollar trade.

There is more two-way price action, he adds. “The dollar trade has become more tactical in nature — it has moved towards an outlook that focuses on who’s going to be the marginal weak player rather than the marginal strong player.”

It is not just the phrase “dollar strength” that is now heard less frequently than earlier this year. “Economic divergence” was all the rage early in 2015.

Dollar against currencies

It looked obvious that the US could forge ahead with a full tightening cycle while the rest of the world lagged behind, recalls Mr Cobon. But the strength of the dollar against the developing world “only acted to accentuate problems there”, he says.

If this linkage — between the US and the rest of the world, the dollar and other currencies — worries the Fed so much, will it also be concerned about the prospect of a US rate hike driving up the dollar, thereby inflicting more pain on EMs?

It should be. The start of previous rate cycles has tended to push the dollar down. But that will not happen this time, says Mr Lambert.

For one thing, past cycles have seen other countries follow suit after the Fed. This time around, only the Bank of England is in a position to raise rates. “So if the Fed raises rates they may be doing it on their own,” says Mr Lambert.

For another, previous Fed cycles have seen the dollar in a secular downward trend before rates went up. This time, it is on an upward trend.

The reasons for that relate to a fundamental shift in the US economy that will have a bearing on the rest of the world.

The dollar trend is strong “not just because of the relative strength of the US economy but because of structural improvements in US external accounts. It is moving towards energy independence and away from excessive consumption, as individuals pay down debt”, says Mr Lambert.

Those “strong dollar” headlines are set for another airing.

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