Saturday, March 22, 2008
Fed, Dollar and Japan
"In the credit market panic that began in August, we have now reached the point of maximum danger: A global run on the dollar that could become a rout. As the [Fed's] Open Market Committee prepares to meet tomorrow, this should be its major concern. Yet the conventional wisdom--on Wall Street and in Washington--continues to be precisely the opposite. In this view, the Fed is 'behind the curve' and needs to cut interest rates even faster and further than it has. ... The Fed's main achievement so far has been to stir a global lack of confidence in the greenback. ... The flight from the dollar has made U.S.-based investments less attractive at a time when the U.S. financial system urgently needs to raise capital. ... In the name of avoiding a recession, reckless monetary policy has made one more likely. ... Dollar weakness explains much of the oil price surge. ... [China's] import prices have surged nearly 14% in the last year, but that is mainly recycling the inflation that the [Fed] has inspired. ... The stock market may rally, until it once again decides that easier money can't remedy what is fundamentally a problem of bank solvency. That problem can only be resolved by financial institutions and regulators coming to grips with the losses, raising more capital to cushion the blow, and closing or selling those banks that can never recover", Editorial at the WSJ, 17 March 2008.
"The Fed's agreement to accept potentially bad assets as collateral, its agressive interest-rate cuts and other liquidity-pumping measures have also helped to pummel the value of the U.S. dollar. The greenback, which last week fell below 100 Japanese yen for the first time since 1995, is off nearly 22% against the yen since last June. ... Given the wide spread betweeen U.S. interest rates and those in Europe and elsewhere, analysts already speculate that the dollar could end up as another carry-trade vehicle", my emphasis, Mark Gongloff (MG) at the WSJ, 18 March 2008.
I agree with the WSJ.