Despite Fed Chair Ben Bernanke's comments this week about inflation, the dollar is dropping -- which is fueling higher oil prices. And the reason for that relates to the different strategies of the Fed and European central banks for fighting inflation.
The difference? The Fed talks about inflation but keeps its interest rate at 2%. If Bernanke was serious about fighting inflation, he'd raise rates. Meanwhile, the New York Times reports that two European central banks -- which set their rates at 4% (European Central Bank (ECB)) and 5% (Bank of England) -- are talking about raising the rates further because they're "alarmed by soaring prices for food and fuel." The ECB thinks May inflation was 3.6% and it expects a 3.4% price rise for all of 2008.
The dollar has lost 70% of its value since January 2001 -- it's dropped from 92 cents to the Euro down to $1.56. Now if you're an investor, would you rather get a 4% return or a 2% one? That's the simple choice faced by people trying to decide whether to buy Euros or Dollars. And with the ECB on track to raise interest rates next month, the dollar is likely to fall further behind unless Bernanke puts the Fed Funds rate where his mouth is.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
6-06-2008 @ 10:22AM
Donald H. Bohne, DDA said...
dhbdds: To raise the rate only causes me to pay more intest on loans that I have, less money to principal and more to interest. The lower rates are saving me over $40,000 in interest alone. Our economy is already in deep trouble, raising rates is not going to stop inflation but getting the price of oil down will definately help.The price of petrol and it's by products affects everyone on the face of the earth.