Finance Ministers Concerned Over Falling Dollar

 |  Includes: FXB, FXC, FXE, FXY, UDN
by: John M. Mason

The G-7 Finance Ministers and Central Bank Governors met in Washington, D. C. this past week and expressed concern over the decline in the value of the dollar. The United States dollar has fallen by about 15% against the Euro over the past year, and has fallen by about 8.0% since the end of 2007. Against the yen, it has fallen by the same amount over the past twelve months, and by almost 10% since the close of 2007.

The dollar has fallen by almost 10% against the currencies of major trading partners of the United States in the past year. Over the past six years, the dollar has been in almost constant decline against most major currencies and against major U. S. trading blocks. The data all seem to show the same result.

The Group of Seven [G-7], generally, is relatively subtle about the statements they make. However, most observers agree that the statement put out by these people last Thursday evening was relatively blunt. The statement read:

Since our last meeting, there have been sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability.
They followed this up by saying:
We continue to monitor exchange markets closely, and cooperate as appropriate.

But, what can be done. The possibilities are not very pleasant: The United States can raise interest rates; Europe, and other countries, can lower their interest rates; or, there can be direct intervention in markets. Although the English lowered rates last week, the European Central Bank has not followed. The English are in the midst of its own housing crisis, and felt that they could not go any longer avoid lowering rates. Other central banks are not so willing to lower rates because, worldwide there is a fear of setting off inflation again.

Much of the rest of the world has gone through the battle to get inflation under control and realign their fiscal and monetary affairs so as to keep inflation under control. This has meant that governments could not lose control of their fiscal discipline and that central banks had to become independent of the national government. In many cases, central banks pursued inflation targeting in order to establish their credibility and gain the confidence and trust of the global investment community. These countries, once they paid the price to achieve this control and credibility, are not willing to give up what came at such a cost. Other central banks will only reluctantly, if at all, lower their interest rates.

The United States has not conformed to the rest of the world in this respect. There has been little or no discipline established over its fiscal affairs and the Federal Reserve, especially between 2002 and 2005, conducted a policy that seemed anything but independent of the administration in Washington, D. C. There is now little or no confidence in the ability of the leaders in the Bush administration to gain the control necessary to regain fiscal discipline and monetary independence. Any necessary action on the part of Washington is going to have to wait until, at least, there is a new administration sworn in. So, don’t bet on the Federal Reserve raising interest rates in the near term.

What about direct intervention? This may work in the very short run, but the long-term consequences of such action is worse than the benefits gained in the short run. These should not be relied upon unless absolutely necessary and then probably not even then.

Sooner or later the United States is going to have to bite-the-bullet and pay for the dislocations it has caused. Like almost every other country in the world, the United States is going to have to pay by the current international rules. America has ‘gone-it-alone’ for almost eight years now, in foreign affairs, as well as in economics and finance. However, in economics and finance, ultimately, you have to pay for the way you have lived - you can only postpone things for so long.

The G-7 Finance Ministers and Central Bank Governors have given the United States a ‘mild’ slap on the hand. But, many financial experts believe that having this issue reach this level is a sign that the rest of the world is tired of the United States doing just what it wants to do. This administration is not going to really do anything about it. The G-7 statement, however, should be taken seriously by everyone of the candidates running for the office of President of the United States.