At what point will the Feds do something about the US$….

[kewp]

Don’t blame the Fed for it.

Um, cutting interest rates increases the money supply. This weakens the dollars purchasing power relative to commodities and other currencies with a more limited supply.

But yeah, you are correct that there is more than the Fed at work here. They still swing a big stick when it comes to dollar valuation, however.

[XBoxBoy]

Several people mentioned that the fed will start defending the dollar when the bond market makes them. Can someone explain this? From what little I know about this, I think the theory is that the falling dollar will cause inflation and then the bond markets will demand higher interest rates. However, from what I can see, as long as the government prints out monthly interest rates that say we have no inflation (even if that’s just a ridiculous bald faced lie) the bond markets are believing them. Maybe I’m wrong about all this. Can someone explain this some more? Thanks,

XBoxBoy

[XBoxBoy]

Several people mentioned that the fed will start defending the dollar when the bond market makes them. Can someone explain this? From what little I know about this, I think the theory is that the falling dollar will cause inflation and then the bond markets will demand higher interest rates. However, from what I can see, as long as the government prints out monthly interest rates that say we have no inflation (even if that’s just a ridiculous bald faced lie) the bond markets are believing them. Maybe I’m wrong about all this. Can someone explain this some more? Thanks,

XBoxBoy

[XBoxBoy]

Several people mentioned that the fed will start defending the dollar when the bond market makes them. Can someone explain this? From what little I know about this, I think the theory is that the falling dollar will cause inflation and then the bond markets will demand higher interest rates. However, from what I can see, as long as the government prints out monthly interest rates that say we have no inflation (even if that’s just a ridiculous bald faced lie) the bond markets are believing them. Maybe I’m wrong about all this. Can someone explain this some more? Thanks,

XBoxBoy

[XBoxBoy]

Several people mentioned that the fed will start defending the dollar when the bond market makes them. Can someone explain this? From what little I know about this, I think the theory is that the falling dollar will cause inflation and then the bond markets will demand higher interest rates. However, from what I can see, as long as the government prints out monthly interest rates that say we have no inflation (even if that’s just a ridiculous bald faced lie) the bond markets are believing them. Maybe I’m wrong about all this. Can someone explain this some more? Thanks,

XBoxBoy

[XBoxBoy]

Several people mentioned that the fed will start defending the dollar when the bond market makes them. Can someone explain this? From what little I know about this, I think the theory is that the falling dollar will cause inflation and then the bond markets will demand higher interest rates. However, from what I can see, as long as the government prints out monthly interest rates that say we have no inflation (even if that’s just a ridiculous bald faced lie) the bond markets are believing them. Maybe I’m wrong about all this. Can someone explain this some more? Thanks,

XBoxBoy

[Daniel]

Yes, you got it perfectly right: all other things being equal, a weak currency fans inflation, through higher import prices. This leads to higher long-term interest rates, as people buying bonds want to be compensated for the higher inflation. That’s it.

Then how come rates are so low today? In a nutshell, it’s very simple, really: you may not believe inflation is low, but the bond market clearly does.

[Daniel]

Yes, you got it perfectly right: all other things being equal, a weak currency fans inflation, through higher import prices. This leads to higher long-term interest rates, as people buying bonds want to be compensated for the higher inflation. That’s it.

Then how come rates are so low today? In a nutshell, it’s very simple, really: you may not believe inflation is low, but the bond market clearly does.

[Daniel]

Yes, you got it perfectly right: all other things being equal, a weak currency fans inflation, through higher import prices. This leads to higher long-term interest rates, as people buying bonds want to be compensated for the higher inflation. That’s it.

Then how come rates are so low today? In a nutshell, it’s very simple, really: you may not believe inflation is low, but the bond market clearly does.

[Daniel]

Yes, you got it perfectly right: all other things being equal, a weak currency fans inflation, through higher import prices. This leads to higher long-term interest rates, as people buying bonds want to be compensated for the higher inflation. That’s it.

Then how come rates are so low today? In a nutshell, it’s very simple, really: you may not believe inflation is low, but the bond market clearly does.

[Daniel]

Yes, you got it perfectly right: all other things being equal, a weak currency fans inflation, through higher import prices. This leads to higher long-term interest rates, as people buying bonds want to be compensated for the higher inflation. That’s it.

Then how come rates are so low today? In a nutshell, it’s very simple, really: you may not believe inflation is low, but the bond market clearly does.

[Daniel]

Kewp,

They certainly swing a big stick. But the ECB’s got one, too, and they don’t hit very hard with theirs, either. I don’t have a chart handy, but I think the ECB’s rate has been around the 2% – 3% range for as long as I can remember. Hardly tight monetary policy, and, still, the euro is up 50% or so against the dollar. My argument is that fundamentals matter much more than rates over the long term. And those fundamentals showed the dollar being too strong for its own good at the end of the last decade. Remember that the last coordinated central bank intervention (Fed, ECB, Bank of Japan) was in support of the euro. Nobody’s making any noise yet to support the dollar, which shows that the central banks are much more comfortable with today’s exchange rates than to those of 2000.

[Daniel]

Kewp,

They certainly swing a big stick. But the ECB’s got one, too, and they don’t hit very hard with theirs, either. I don’t have a chart handy, but I think the ECB’s rate has been around the 2% – 3% range for as long as I can remember. Hardly tight monetary policy, and, still, the euro is up 50% or so against the dollar. My argument is that fundamentals matter much more than rates over the long term. And those fundamentals showed the dollar being too strong for its own good at the end of the last decade. Remember that the last coordinated central bank intervention (Fed, ECB, Bank of Japan) was in support of the euro. Nobody’s making any noise yet to support the dollar, which shows that the central banks are much more comfortable with today’s exchange rates than to those of 2000.

[Daniel]

Kewp,

They certainly swing a big stick. But the ECB’s got one, too, and they don’t hit very hard with theirs, either. I don’t have a chart handy, but I think the ECB’s rate has been around the 2% – 3% range for as long as I can remember. Hardly tight monetary policy, and, still, the euro is up 50% or so against the dollar. My argument is that fundamentals matter much more than rates over the long term. And those fundamentals showed the dollar being too strong for its own good at the end of the last decade. Remember that the last coordinated central bank intervention (Fed, ECB, Bank of Japan) was in support of the euro. Nobody’s making any noise yet to support the dollar, which shows that the central banks are much more comfortable with today’s exchange rates than to those of 2000.

[Daniel]

Kewp,

They certainly swing a big stick. But the ECB’s got one, too, and they don’t hit very hard with theirs, either. I don’t have a chart handy, but I think the ECB’s rate has been around the 2% – 3% range for as long as I can remember. Hardly tight monetary policy, and, still, the euro is up 50% or so against the dollar. My argument is that fundamentals matter much more than rates over the long term. And those fundamentals showed the dollar being too strong for its own good at the end of the last decade. Remember that the last coordinated central bank intervention (Fed, ECB, Bank of Japan) was in support of the euro. Nobody’s making any noise yet to support the dollar, which shows that the central banks are much more comfortable with today’s exchange rates than to those of 2000.

[Author]

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