Friday, October 01, 2010

The Increasingly Manipulated U.S. Dollar

When the Japanese central bank launched its intervention on September 15, the yen stood at 83 versus the U.S. dollar. It then briefly dropped so that a dollar would cost 86 yen. Today however, we can see that the yen is back to the 83 level.

However, it is not so much the yen that has regained it's strength, it is the U.S. dollar that has depreciated. During the same period, the euro and the Swedish krona has appreciated nearly 6% against the U.S. dollar, the Australian dollar is up 3% and the pound and the Swiss franc are up 2%.

Why it is not clear why the euro and the Swedish krona in particular have risen so much, it is more clear why the dollar is down: namely the factors that I wrote about last week, in the form of higher inflation and inflationary expectations.

The latest week has featured a continued drop in bond yields (with the real yield down another 16 basis points and the nominal yield down 10 basis points as of this writing), rise in commodity prices while stock prices have remained largely unchanged all suggesting increased inflation and expectations of inflation. Much of it can be traced to the signals that Fed officials have given about another round of quantitative easing.

What would you call it when a central bank like the Fed does now pursues policies designed to debase the value of a currency? I would call it currency manipulation, the thing that U.S. politicians hypocritically points fingers at (and threatens with sanctions for) others for doing.