What's one possible consequence of the major interventions by the U.S Federal Reserve and U.S. Treasury?The dollar's safe-haven status may end, or at least diminish as the increased dollars in supply lowers the dollar's value and perhaps increases inflation.
On Wednesday, the dollar fell after the Fed Tuesday cut its key, short-term interest rate by 75 basis points to a targeted 0.00%-0.25% basis point range, and also said it would continue to use non-traditional techniques to keep markets liquid. The dollar weakened about 1 cent to $1.4094 versus the euro, about 2 cents to $1.5353 versus the British pound, and about 1.6 cents to $1.1076 versus the Swiss franc. The dollar also fell about one-half yen to 88.46 against Japan's yen.
In one scenario, low interest rates, a recovering global economy and a re-emergence of risk appetite drive institutional investors out of the dollar in favor of stronger major currencies, such as Japan's yen and the Swiss franc. The U.S.'s rising budget deficit also would weigh on the dollar.
However, the above scenario is not guaranteed, so says economist Richard Felson. Under a different scenario, the dollar weakens somewhat on the aforementioned lower interest rates and liquidity actions, but then the dollar firms and rises, as the U.S. economy recovers before the European and Asian economies do.
"We are by no means dealing a slam-dunk, dollar depreciation scenario here. It is complex and there are mitigating factors, a big one of which is the U.S. economy. If U.S. growth recovers, it will attract investors to dollar-denominated assets, which will support the dollar," Felson said. "A second factor is the geopolitical climate. If it remains clouded, that also typically benefits the dollar."
Forex / Economic Analysis: Indeed, lower U.S. interest rates and a recovering global economy suggest a lower dollar, but the U.S. economy remains the wild card, so the issue has not been resolved. The dollar could still firm as the world adjusts to the 'new' monetary environment. Stay tuned.
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Reader Comments (Page 1 of 1)
3-16-2009 @ 10:49AM
Ana said...
The Fed's gesture, is a very good accion that will benefit the banks only to have money secure in their safety boxes perhaps. Nonetheless, until the fundamentals of this crisis are deal with interest to start fixing the crisis; nothing is going to work. Secure jobs is the prosperity of anyone in the world; to become self sufficient. Knowing that the banks are getting money at zero or 0.25% is exelent, but nobody in the right mind is going to pay more than 2% interest to borrow money from institutions and use tax payers as collateral damage. This crisis is a war in our Nation and shall be treated as such. The goverment shall intervene before it's too late. Please cancel your agendas and get to work on an important issue that if not attended, it's going to scar the generations to come.
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