[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.

[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]

I think it’s a big misconception that the falling dollar is somehow the Fed’s fault. First of all, the dollar has weakened, but this doesn’t make it cheap. A different point of view is that it was extremely overvalued not long ago, because of all the capital inflows chasing the new economy supposedly built here. I remember talking to a friend at UBS in 1999, and she was very nervous back then about the dollar being “obscenely overvalued”, as everybody from Europe, Asia and the Middle East was busy piling into it.

Now we see the same thing in reverse. On top of that, we’ve had rather large budget and trade deficits lately. That’s not really the Fed’s fault, either. The administration is mostly to blame for the budget deficit, and the overvalued dollar itself (and China’s policies, to some extent) for the trade deficit.

If you think interest rates are to blame for the dollar’s fall, think again. Fed fund rates are now just a tad lower than ECB euro rates, and were actually quite a bit higher in 2006 and 2007. It’s not higher euro rates that caused the dollar drop, it’s fundamentals. The dollar was way overdue for a correction, and like all “bubbles”, the only question about the dollar unwind was its timing. My friend was way early in 1999, Buffet was kind of early as well (in 2003, I think), but it finally happened. Don’t blame the Fed for it.

[Daniel]

I think it’s a big misconception that the falling dollar is somehow the Fed’s fault. First of all, the dollar has weakened, but this doesn’t make it cheap. A different point of view is that it was extremely overvalued not long ago, because of all the capital inflows chasing the new economy supposedly built here. I remember talking to a friend at UBS in 1999, and she was very nervous back then about the dollar being “obscenely overvalued”, as everybody from Europe, Asia and the Middle East was busy piling into it.

Now we see the same thing in reverse. On top of that, we’ve had rather large budget and trade deficits lately. That’s not really the Fed’s fault, either. The administration is mostly to blame for the budget deficit, and the overvalued dollar itself (and China’s policies, to some extent) for the trade deficit.

If you think interest rates are to blame for the dollar’s fall, think again. Fed fund rates are now just a tad lower than ECB euro rates, and were actually quite a bit higher in 2006 and 2007. It’s not higher euro rates that caused the dollar drop, it’s fundamentals. The dollar was way overdue for a correction, and like all “bubbles”, the only question about the dollar unwind was its timing. My friend was way early in 1999, Buffet was kind of early as well (in 2003, I think), but it finally happened. Don’t blame the Fed for it.

[Daniel]

I think it’s a big misconception that the falling dollar is somehow the Fed’s fault. First of all, the dollar has weakened, but this doesn’t make it cheap. A different point of view is that it was extremely overvalued not long ago, because of all the capital inflows chasing the new economy supposedly built here. I remember talking to a friend at UBS in 1999, and she was very nervous back then about the dollar being “obscenely overvalued”, as everybody from Europe, Asia and the Middle East was busy piling into it.

Now we see the same thing in reverse. On top of that, we’ve had rather large budget and trade deficits lately. That’s not really the Fed’s fault, either. The administration is mostly to blame for the budget deficit, and the overvalued dollar itself (and China’s policies, to some extent) for the trade deficit.

If you think interest rates are to blame for the dollar’s fall, think again. Fed fund rates are now just a tad lower than ECB euro rates, and were actually quite a bit higher in 2006 and 2007. It’s not higher euro rates that caused the dollar drop, it’s fundamentals. The dollar was way overdue for a correction, and like all “bubbles”, the only question about the dollar unwind was its timing. My friend was way early in 1999, Buffet was kind of early as well (in 2003, I think), but it finally happened. Don’t blame the Fed for it.

[Daniel]

I think it’s a big misconception that the falling dollar is somehow the Fed’s fault. First of all, the dollar has weakened, but this doesn’t make it cheap. A different point of view is that it was extremely overvalued not long ago, because of all the capital inflows chasing the new economy supposedly built here. I remember talking to a friend at UBS in 1999, and she was very nervous back then about the dollar being “obscenely overvalued”, as everybody from Europe, Asia and the Middle East was busy piling into it.

Now we see the same thing in reverse. On top of that, we’ve had rather large budget and trade deficits lately. That’s not really the Fed’s fault, either. The administration is mostly to blame for the budget deficit, and the overvalued dollar itself (and China’s policies, to some extent) for the trade deficit.

If you think interest rates are to blame for the dollar’s fall, think again. Fed fund rates are now just a tad lower than ECB euro rates, and were actually quite a bit higher in 2006 and 2007. It’s not higher euro rates that caused the dollar drop, it’s fundamentals. The dollar was way overdue for a correction, and like all “bubbles”, the only question about the dollar unwind was its timing. My friend was way early in 1999, Buffet was kind of early as well (in 2003, I think), but it finally happened. Don’t blame the Fed for it.

[Daniel]

I think it’s a big misconception that the falling dollar is somehow the Fed’s fault. First of all, the dollar has weakened, but this doesn’t make it cheap. A different point of view is that it was extremely overvalued not long ago, because of all the capital inflows chasing the new economy supposedly built here. I remember talking to a friend at UBS in 1999, and she was very nervous back then about the dollar being “obscenely overvalued”, as everybody from Europe, Asia and the Middle East was busy piling into it.

Now we see the same thing in reverse. On top of that, we’ve had rather large budget and trade deficits lately. That’s not really the Fed’s fault, either. The administration is mostly to blame for the budget deficit, and the overvalued dollar itself (and China’s policies, to some extent) for the trade deficit.

If you think interest rates are to blame for the dollar’s fall, think again. Fed fund rates are now just a tad lower than ECB euro rates, and were actually quite a bit higher in 2006 and 2007. It’s not higher euro rates that caused the dollar drop, it’s fundamentals. The dollar was way overdue for a correction, and like all “bubbles”, the only question about the dollar unwind was its timing. My friend was way early in 1999, Buffet was kind of early as well (in 2003, I think), but it finally happened. Don’t blame the Fed for it.

[Daniel]

Follow-up to my previous comment: it may seem hard to believe to some, but there was a time in the recent past (late nineties) when oil, gold or the euro went down abruptly against the dollar. When measured by these yardsticks, prices of everything from toasters to tomatoes rocketed upwards. I didn’t hear anybody complaining that jeans prices tripled when measured in oil, and were therefore too expensive. Did you?

And another thing: there is current inflation, and a lot of it, outside the US. That is because many people worldwide used to keep their savings in dollars. They are the ones “being robbed”. But they can’t really blame the Fed: there is no mandate for the Fed to keep inflation low in Brazil or Kazahstan. Individuals and central banks outside the US keeping their savings in dollars did so at their own risk. They may think “fool me once, shame on you, fool me twice, shame on me”, and move away from the dollar, and that would hurt us. Fair enough. But, again, the bond market would go haywire if this happens. Interest rates would go up. That’s not good for housing prices, nominal or otherwise.

[Author]

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