Is the Fed Driving Down the Dollar to Boost Inflation?

High market volatility doesn’t stop just because traders are taking it easy with Christmas holidays lurking around the corner. One of the biggest movements in the financial markets this week has got to be the fast and furious decline of the US dollar in the forex market, which has turned cold from hot, in as fast a speed as for-sale designer wear being snapped up at Saks Fifth Avenue.

The US dollar has fallen more than 1300 pips against the Swiss franc since Monday (and it’s only Thursday!), from a high of 1.1770 to Thursday’s intraday low of 1.0410, which makes it the biggest weekly fall ever!

Against the Euro, the USD has also tumbled more than 1300 pips since the start of the week. The zombie-like ascent of EUR/USD continued Thursday despite the release of the very disappointing German IFO business climate index, which fell to the lowest level in 26 years. As for the US dollar index, it has had its biggest six-day fall ever. The Fed’s cut of the fed funds rate to 0% to 0.25% on Tuesday has made it unappetizing for institutional investors to hold dollars.

Could the Fed be trying to drive the dollar lower to spur inflation? Axel Merk from Merk Fund thinks so. He said that as policy makers don’t want home prices to deteriorate further, an alternative is to inflate the prices of all other goods and services: as a result, the relative prices of homes would be less expensive. And weakening the dollar is an effective policy tool to drive up inflation.

One good thing about trading forex is that you can easily buy or sell a currency against another, without any restrictions, in addition to the 24-hour market action. The absolutely-free forex options trade alerts, sponsored by the International Securities Exchange (ISE), have generated Christmas profits for many of the subscribers. So whether you trade spot forex or forex options, you should sign up for it now!

Comments

[Alex Filonov:]

It might be a new, bigger, round of dollar carry trade. Fed wouldn't mind inflation, but it's nowhere in sight.

2008 Dec 18 04:47 PM

[bricki:]

Cheap dollar here is a good idea. First it is a recognition of reality, that the dollar is overvalued, plus it will ease balance of trade, discourage purchase of dollars by offshore investors and encourage exports. It will also prevent import oil from cratering further, helping investment in domestic energy production.

2008 Dec 18 04:59 PM

[Chris B:]

Um... more like the Fed is fighting inflation with low rates which causes the dollar to fall.

Not much to this article besides an argument that currencies have predictable behaviors (they don't) and that you should go to their for-profit forex trading site and wager your life savings (you probably, no definitely, shouldn't).

2008 Dec 18 05:10 PM

[Ricard:]

I think a better play would be to buy undervalued foreign assets as opposed to straight currency. Otherwise, good points in this article.

2008 Dec 18 05:14 PM

[happysoul77777:]

It's so obvious...they are to re-inflate to fight deflation!

2008 Dec 18 05:36 PM

[CautiousInv...:]

No. Preventing deflation is different than pursuing policies of inflation. Bernanke, and others, believe they can calibrate and control the hot money and remove it from the system before the onset of inflation. But, If they cannot manage interest rates, which are far more transparent, how can they manage hot money which is far more opaque?

2008 Dec 18 06:13 PM

[hoister:]

the truth is the United States is broke . The U.S. should have a stash of gold and silver ... not debt . You can't fix debt with more debt . the U S should declare bankruptcy and Stop giving money away to countries who hate us .........it's too late ...ins companys next ....credit cards about the same time .......even unions like the UAW will fold ...next year the dollar will be worth 80 cents ..and the year after 55 cents compared to today even .....

2008 Dec 18 06:37 PM

[Vladimir Se...:]

fed isn't driving down the dollar by choice. it's giving it up because he is almost out of ammo, he is compelled to do "something" and this one of those few remaining things that he can actually CAN do, still.

2008 Dec 18 06:53 PM

[nport:]

The Fed and The Politicos have little choice: they must inflate to fight deflation which will wreck our society. They are between a rock and a hard place: The lesser of two evils is a little inflation..but a little inflation is like saying your girlfriend, wife, daughter is just 10% pregnant. Inflation will also wreck our economy and lead to the big D. Our currency is being debased..and the Fed will have to take currency off the table or risk hyperinflation down the road..that will raise rates and produce an end to the bubble in the bond markets. Our trading partners will eventually refuse to accept payment in dollars and that will produce very high interest rates..so I think over the next 3-5 years being short US Treasuries might be our best hedge..maybe more than gold which I also like. I'll end here.

2008 Dec 18 08:58 PM

[X-15:]

If I ran the FED I'd make sure China,Australia, Canada, Brazil, keep from going down to far...hence create implication of inflationary tendencies with policy. Support basic materials, mining, and Ag interests by creating cheap money policy.

Obamas' test will be how serious he is going to be on Alt Energy. If he adopts Boone Picken Plan it will create a stir, Worldwide !

Gold, Natural Gas, Solar, Oil Sands, Bakken Shield, Agriculture

CLR, KWK, SU, EWA, PBR, BBD, JST, CHNG, JZC, IVN, AUY, HNP,BW, TCK, FCX

2008 Dec 18 09:35 PM

[Asbytec:]

Alex, yea, a dollar carry trade is scary to me. But, fortunately, carry trades abhor volatility. Thank goodness for volatility.

Bricki, okay, good points. A weaker dollar might help trade. But, I'll tell you what I believe will really help trade deficits...production. Actually producing something to trade with, beyond cars, meat and dairy, and corn. Something high tech and useful. I think the US ought to take the lead on hydrogen energy development. I mean, if we really want to get out from under heavy oil dependency, eh?

Ah, but we're a financial economy, not a productive one. Besides, China, Germany, and Japan have greater export industries that the US. That's what's really hurting us. If we could trade fairly and offer something in return, the dollar will take care of itself.

No nation has ever devalued itself into prosperity.

Ricard makes a good point. Why not a stronger dollar and buy foreign assets? I like it. Unfortunately, we've sold all of ours.

As everyone mentioned, yes the Fed is giving up the ghost to fight the economy killing evils of deflation. Our banking system flourishes on inflation and dies during deflation. It most certainly will be a matter of timing. I just hope Bernanke is also a scholar on the Japanese model.

2008 Dec 18 10:57 PM

[auto credit:]

good work

2008 Dec 19 04:26 AM