Tuesday, 12 Oct 2010 12:39 PM
By: David Frazier
The value of the U.S. dollar compared to a basket of other
major world currencies fell sharply during the past four weeks
in response to traders’ expectations that the Federal Reserve
will soon enter a new wave of so-called quantitative easing by
purchasing massive amounts of U.S. government and/or
government-agency securities.
Although any such purchases by the Fed would normally cause the
exchange-value of the dollar to fall as the Fed increased the
supply of dollars, my experience suggests that the dollar will
rebound during the weeks ahead.
That’s because my research indicates that the Fed will not
purchase anywhere near the amount of government and/or
government agency securities that most market participants
expect — and because the central banks of numerous foreign
governments will likely increase their purchases of U.S.
Treasury securities in an effort to halt a potential continued
decline in the exchange-value of the U.S. dollar.
U.S. commercial banks already have almost $1 trillion in
deposits to lend to their customers, borrowing rates are
currently near historic lows, approximately 17 percent of the
U.S. workforce is unable to secure a full-time job, and American
households are currently more interested in paying down debt
than borrowing money to spend on unnecessary discretionary
items. Those factors suggest that any substantial purchases of
U.S. government securities by the Fed would fail to stimulate
borrowing and spending.
Meanwhile, a new wave of quantitative easing might cause
long-term interest rates to rise because any such purchases
would likely lead to a continued decline in the exchange-value
of the dollar and to people thinking that such a decline would
cause inflation rates to rise.
With the Federal Reserve being aware of those likely
consequences, I’m convinced that the Fed will not enter a new
wave of quantitative easing.
Separately, foreign governments have an implicit interest in
maintaining the exchange-value of the U.S. dollar. That’s
because economies of many countries around the globe are heavily
dependent on exports to the United States.
If the exchange-value of the U.S. dollar were to fall sharply,
the prices that Americans would pay for foreign goods and
services would likely rise sharply and Americans would therefore
likely reduce their purchases of such goods and services.
Recognizing that fact, countries such as China, the United
Kingdom, Brazil and Japan would likely increase their purchases
of U.S. dollars to halt a continued decline in the
exchange-value of the U.S. dollar.
Central banks in the countries mentioned above, as well as in
numerous other countries, already increased their purchases of
U.S. dollars during July – the latest month for which data is
currently available – and I expect that trend to continue during
the months ahead.
I therefore urge you to not fall prey to some persons’ claims
that the dollar is doomed to continue its recent descent.
Note from Moneynews:
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About the Author:
David
Frazier
David Frazier is a member of the Moneynews Financial Brain
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