The U.S. dollar has been under siege since June when the U.S. dollar futures index reached a high of 89.11. In today's trading the index traded at 77.34. According to Federal Reserve minutes released Tuesday, it looks like the Fed is behind this -- engineering a weaker dollar to boost commodities and the stock market and give U.S. exporters an edge in world trade, The Wall Street Journal reports.
The very fact that the Fed plans additional purchases of U.S. Treasuries to stimulate the economy is almost a sure bet to further devaluation of the dollar. The Fed prefers inflation because it is deathly afraid of deflation. The Fed sees inflation as the better of the two evils.
The weak dollar worked well during the first leg of the recovery, with little inflation. Since then, however, commodities have begun a slow but steady rise. Increases in the prices of raw materials are being passed on to consumers. Food prices are rising and gas prices are just shy of $3.00 per gallon.
At the International Monetary Fund meeting last week, there was talk of currency wars. Already, Thailand has approved measures aimed at containing the baht's rapid rise, the Journal adds. Japan has said it will take action if needed. Brazil's finance minister complained that the U.S. and Japanese economic policies are fueling a flight of money into emerging markets.
There could be a deeper hidden agenda on the Fed's part. With such huge deficits, why not keep interest rates low, print tons of money and pay off the debt with worthless dollars?
Right now, the Fed is having a field day with the one-two combination of already low rates and further quantitative easing. It has been able to issue trillions in Treasuries to finance the debt with little difficulty. How long this will last is the key question going forward.
Would you want to buy low rate bonds and see your money being devalued? And what about foreign buyers like China and Japan?