Strong (?) US dollar11 June, 2008, 14:45. Posted by Zarathustra
Tags: Currency, Economy, Inflation
Fed Board Vice Chairman Donald Kohn and Fed Bank of St. Louis President Jim Bullard are scheduled to deliver speeches. Investors added to bets the central bank will raise interest rates this year, increasing the allure of dollar denominated- assets. Treasury Secretary Henry Paulson this week said he would “never” rule out currency intervention.
Another piece from Bloomberg:
Federal Reserve Chairman Ben S. Bernanke threw the weight of the central bank behind Treasury Secretary Henry Paulson’s efforts to strengthen the dollar after its 10 percent drop over the past year.
Is US dollar at the bottom now? In order to contain inflation worldwide, rates will be higher, not only in US, but all over the world. I believe the precondition for US dollar to rise is for the Federal Reserve to raise interest rate faster than the other counterparts, like the European Central Bank. It is quite unlikely than US will raise rates but ECB not, because ECB is fighting with inflation too, and they have warned a rate increase in the next meeting.
Central Banks all over the world are struggling to strike the balance of supporting economic growth and bring down inflation. This balance is difficult to get to, and it is more likely than not that if central banks want to contain inflation, they have to use the tactic which was used by Paul Volcker, who limited the growth of money supply.
So to me, whether the dollar can regain its strength is quite unclear. Currencies market is very large and very liquid, the price of one currency is not likely to be affected by one or two top officials who say they like strong currency. Well, I like strong dollar too, but my power is too little. Unfortunately, Ben Bernanke would not be much more powerful than you or I in intervening currencies.
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