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July 11th 2010

US Apathetic about Dollar

Recently, it struck me: the US does not care about the Dollar. If you look at fiscal and monetary policy, there is actually a remarkable degree of consistency. Both reflect a clear disregard for the conditions that are necessary for a strong currency.

This might seem ridiculous, given the Dollar’s amazing performance of late. It has appreciated healthily against almost all of the world’s major currencies, and is also more valuable on a trade-weighted basis. Bear in mind, however, that this rise is entirely a function of the (perceived) crisis in Europe. It speaks not to any strength in the Dollar, but rather to weakness in other currencies. In fact, as I wrote earlier this week (“US Dollar Paradigm Shift“), as investors have returned their gaze to the fundamentals, the Dollar has suffered.

Without drilling into the nuts and bolts of US fiscal policy, consider that the US budget deficit will exceed an unthinkable $1 Trillion for a second year in a row. The national debt is now growing much faster than GDP, and servicing it is consuming an ever-increasing share of the budget. With concerns looming of a double-dip recession, meanwhile, tax revenues will probably stagnate, even regardless of what happens to spending. In short, US budget deficits are going to continue to be a fact of life for the immediate future.

Monetary Policy is equally disastrous. The Fed is pre-occupied with keeping interest rates low and with promoting an economic recovery. $2 Trillion of newly-minted money is still flowing through the system, and it’s unclear when it will be siphoned out. There are a few inflation hawks on the Fed’s Board of Governors, but they lack the power to effect a short-term change in monetary policy.

The Bank for International Settlements (BIS), G20, and a pair of economists, among others, have all sounded alarm bells, calling such policies foolish and unsustainable. According to the BIS, “Keeping interest rates very low comes at a cost—a cost that is growing with time. Experience teaches us that prolonged periods of unusually low rates cloud assessments of financial risks, induce a search for yield and delay balance-sheet adjustments.”

In short, there is a clear consensus that perennial budget deficits and low rates are wrongheaded at best, and disastrous at worst. From the standpoint of currency markets, what matters in the short-term are interest rates, and what matters in the long-term is inflation. The Dollar is in an unfavorable position on both fronts. Interest rates are currently near 0% – the lowest in the world – and easy monetary policy and high government debt increase the likelihood of inflation in the wrong-term.

In light of this notion, the only logical conclusion is that the Dollar simply plays no role in the formulation of government and Central Bank decision-making. Since the inception of the credit crisis, this was a luxury that could be afforded, as safe-haven capital poured into the US. If/when the crisis abates, this capital will probably depart, as investors are forced to consider the fundamentals.

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Posted by Adam Kritzer | in Central Banks, News, US Dollar | 2 Comments »

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2 Comments of “US Apathetic about Dollar”

  1. Patricia Zimmerman Says:

    It seems to me their attitude toward the dollar may well be tied to the globalization agenda. They have plans for humanity. I am no expert, but I do know such plans were hatched in Europe long ago. H.G. Wells, for one, wrote about them at length. One of the most interesting documents I have read this past year is the founding document for UNESCO, written by the brother of Aldous Huxley (Sir Julian Huxley), titled “UNESCO: It’s Intents and Purposes”. This document is available online. It lays out the blueprint for their global domination agenda and describes the basic role of the UN, and UNESCO in particular, in bringing such plans to fruition. Extremely creepy stuff. (1984 was probably written in reaction to these plans. Orwell and Aldous Huxley were lifelong friends.) In depriving the people of political voice, it is probably necessary to first deprive them of property.

  2. Abhid-D Says:

    The dollar rates and oil prices are tied. If one falls, the other rises thus bringing the other up along with its rise.

    Its true that the US dollar started falling just before the recession. However, the OPEC nations saw this as a dip in their purchasing power (since they accumulate dollars for their oil exports). So, they raised oil prices. This in turn increased the demand for dollars in th global market, and thus raised it back strongly against other currencies.

    The arrangement between the dollar and oil prices is very neat. In fact, after the Nixon Shock oil has become the new gold.

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