The combination of the apparent resolution of the West LB situation and the FOMC minutes have conspired to send the US dollar broadly lower today. The FOMC minutes in particular have been seized upon. On one hand, it is unusual for the FOMC to give so much space to a discussion about the dollar. This is, however consistent with what appears to be a stepped up campaign by both Treasury and Fed officials to cite the dollar in an unsolicited way. The ostensible purpose is likely to demonstrate that there is no "malign neglect".
On the other hand, what they did say was essentially what Bernanke said last week. The Fed is monitoring developments in the foreign exchange market and the dollar's price action is not jeopardizing the FOMC's ability to pursue its dual mandate. To the extent there seemed some net additive in the minutes, it is the formal recognition of potential negative consequences of very low short-term interest rates for an extended period of time: it "could lead to excessive risk-taking in the financial markets". So, the Fed recognized the concerns US officials heard at the recent G20 and APEC meetings, and then dismissed them: "While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks." At the same time, the minutes suggest the Fed generally sees the dollar's decline since March as largely unwinding of the safe haven gains scored in H2 08. The bottom line is that although the dollar is having a greater role in the declaratory policy, operational policy has not changed. That said, we continue to suspect that if formally requested by the other major central banks, justifiable on the Fed's conditions--boosting inflation expectations or producing excessive risk-taking, US policy makers might not dismiss it out of hand. One implication of this observation is that despite the jawboning and words of warning, it does not appear ECB officials or Japanese officials are prepared to do anything either.
On the other hand, what they did say was essentially what Bernanke said last week. The Fed is monitoring developments in the foreign exchange market and the dollar's price action is not jeopardizing the FOMC's ability to pursue its dual mandate. To the extent there seemed some net additive in the minutes, it is the formal recognition of potential negative consequences of very low short-term interest rates for an extended period of time: it "could lead to excessive risk-taking in the financial markets". So, the Fed recognized the concerns US officials heard at the recent G20 and APEC meetings, and then dismissed them: "While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks." At the same time, the minutes suggest the Fed generally sees the dollar's decline since March as largely unwinding of the safe haven gains scored in H2 08. The bottom line is that although the dollar is having a greater role in the declaratory policy, operational policy has not changed. That said, we continue to suspect that if formally requested by the other major central banks, justifiable on the Fed's conditions--boosting inflation expectations or producing excessive risk-taking, US policy makers might not dismiss it out of hand. One implication of this observation is that despite the jawboning and words of warning, it does not appear ECB officials or Japanese officials are prepared to do anything either.
Why The Dollar is Broadly Lower
![Why The Dollar is Broadly Lower]()
Reviewed by magonomics
on
November 25, 2009
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