- The Washington Times - Tuesday, November 17, 2009

The dollar fell to its lowest level in nearly 15 months Monday despite efforts by top U.S. and Asian officials to talk up the American currency.

Federal Reserve Chairman Ben S. Bernanke offered an unusual defense of the dollar Monday, following remarks by Treasury Secretary Timothy F. Geithner and Asian officials over the weekend, saying the central bank is “attentive” to the dollar’s decline and wants the currency to stay strong.

But the jawboning did little to prevent the dollar from dropping further against other major currencies, with markets dismissing it as “all talk, no action.” Many analysts say the dollar’s fall will stop only when the Fed raises interest rates - something that Mr. Bernanke indicated once again is not likely to happen for as long as a year because of concerns about unemployment and the weak economy.

“We are attentive to the implications of changes in the value of the dollar,” he told the Economic Club of New York. But while the falling dollar poses a risk of higher inflation as it raises the price of imported goods like oil, he said inflation nevertheless “seems likely to remain subdued for some time” because businesses have little wherewithal to raise prices in today’s weak economy.

Mr. Bernanke stressed that central bank has a dual mandate both to prevent inflation and promote full employment. With more than one in 10 U.S. workers now unemployed and the economy still losing jobs at the rate of 200,000 a month, he said, the Fed remains focused on nurturing the economy back to the point where it can begin to create jobs again.

The dollar briefly erased its losses against the euro on Mr. Bernanke’s supportive remarks, but within minutes resumed its decline as investors focused on the Fed’s determination to keep interest rates near zero to support the economy.

“The foreign exchange markets certainly took note of Chairman Bernankes dollar comments,” because the Fed chairman rarely speaks out about the dollar, said Vassili Serebriakov, currency strategist at Wells Fargo Securities. But he noted it had no lasting effect because the markets are focused on what the Fed does, not what it says.

“In the absence of any notable shift on the policy front, we doubt that ‘official jawboning can do much to reverse the current weak dollar trend,” he said.

Others analysts noted that Mr. Bernanke did not signal any real concern about the dollar’s slide this year.

The dollar’s decline of about 12 percent against other major currencies since March has essentially brought it back to where it was before the financial crisis broke out last year, Mr. Bernanke noted. The dollar appreciated steeply last fall and winter because investors around the world were piling into dollars and Treasury securities as safe havens from the financial storms engulfing most other global markets.

As the world economy got on the road to recovery in March and stock markets rebounded from lows, investors started to pull their money out of Treasuries and put it into stocks, commodities and other investments that grow with the economy, he noted.

Thus, the reasons for the dollar’s decline so far have been welcome ones, he said, but the Fed will “continue to monitor these developments closely,” lest things take a turn for the worse.

A report released by the New York Fed on Monday made the same points as Mr. Bernanke. It noted that investors were leaving U.S. safe haven investments because the prospects for growth around the world had improved. While the U.S. economy also is starting to emerge from recession and post growth, the report noted that growth is more robust in major emerging countries such as China and Brazil, so that has been the destination of much of the investment flows, even from American investors.

While interest rates are low in most countries like the U.S. that are recovering from recession, a few countries such as Australia have started to raise rates and that is attracting investors and contributing to the dollar’s decline, the report noted. The Fed report, like Mr. Bernanke’s address, characterized the reasons for the dollar’s fall as understandable and even welcome.

“The Fed cares about the currency only to the extent that it impacts inflation and unemployment. And this is certainly not the case right now,” said Harm Bandholz, economist at Unicredit Markets.

“Most Fed officials are concerned about the sustainability of the economic recovery,” thus will remain focused on fostering growth, he said. The dollar’s fall actually helps spur growth in the U.S. by making American exports cheaper and more attractive to buyers overseas.

Given the prospects for a long period of low rates in the U.S., statements by Mr. Geithner and other Asian officials at a summit of Pacific Rim leaders over the weekend also did little to deter market sentiment against the dollar, said Mark Frey, a foreign exchange analyst at Custom House.

“The longer the Fed remains on hold with respect to its record low interest rates, the longer the U.S. dollar will remain under pressure,” he said.

The Fed’s stance also is spurring a so-called carry trade in which investors borrow in U.S. dollars at low interest rates and then invest their borrowed funds in fast-growing countries such as Australia and Brazil where both the stock markets and currencies are appreciating rapidly. To complement this leveraged investment strategy, many investors also are making bets that the dollar will decline further, in what has become a self-fulfilling prophesy.

“The worlds love affair with the mother of all carry trades is alive and well,” said Mr. Frey.

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