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Dollar Defies Greenspan Fix
Federal Reserve Chairman
Alan Greenspan and his fellow central bankers may bear some
responsibility for the dollar's decline -- but don't expect them to
do much to end the trend. After all, the Fed didn't cut rates to
such historic lows because the dollar was overvalued. And now that
the dollar is on the wane, they've got bigger problems to deal with.
In theory, the historically low short-term interest rates the Fed
kept in place over the past few years should have prompted global
investors to move money to countries where they can earn a better
return. So with the Fed now raising rates and the economy still
doing well, shouldn't the dollar rally as those investors are lured
back?
It's not working out that way this time because, to borrow from the
classic Terry Gilliam movie Brazil, there's been a little
complication with the dollar's complications.
For a while at least, the "complication" of Asian central banks
buying Treasuries limited the dollar's decline. Instead of
converting trade surpluses back into local currencies by selling
dollars, they kept their export bounty and amassed huge dollar
reserves. Now that complication has developed a complication of its
own as investors realized that central bank demand was hardly
unlimited. Russia and China recently have given indications that
they might be tiring of owning so many dollars.
"Interest rates aren't the only thing that matters," explained T.
Rowe Price chief economist Alan Levenson. "It's the current account
deficit and the fiscal deficit that have been exerting downward
pressure."
For the past few years, American consumers and the federal
government have been running up huge debts that are being financed
in large part by Asian central banks. China and Japan collectively
own $895 billion of Treasuries as of Sept. 30. That financing
imbalance, along with increasing purchases of imported goods such as
oil, have driven the U.S. current account balance with the rest of
the world to record levels -- 6% of GDP last quarter and counting.
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Source:
THE STREET
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