June 12, 2024

FOREX Traders Call Bernanke’s Hand

Currency traders have voted on the Fed’s latest policy decisions and this is the result – a collapsing dollar.

Courtesy of stockcharts.com

The magnitude of the latest rate cut apparently surprised foreign dollar holders who can only assume that the US economy is weaker than they previously believed.  Why would a foreign investor hold dollars that return zero interest and also risk foreign currency losses on top of that?

The Fed’s intention to create as many dollars as necessary to cure the credit markets is creating a huge oversupply of dollars.  Is the falling dollar the result of unintended consequences or was it a deliberate calculation by the Fed to weaken the dollar?  A weak dollar means US companies can sell their goods at cheaper prices, thus boosting sales and profits.   A weak dollar would also boost the price of foreign imports and in theory help prevent further deflation.  If the Fed was planning on a weak dollar policy, it was a poor choice on either count.  Consumers can’t afford higher prices and other nations can also cut rates to zero.

Previous actions of the Treasury and the Federal Reserve have not inspired confidence.  They are trying everything that might work with no certainty of the end result.    An almost proactive policy to weaken the dollar may only invite competitive devaluations, creating further havoc in the currency markets.

The factor that may now cause the most fear is that  interest rate cuts are no longer a policy option.  The unintended consequences of applying unconventional monetary policy, the only option left, may now be the biggest fear of all.