Treasury or Fed Driving Dollar Direction?
finance.myway.com
NEW YORK (Reuters) - The U.S. Treasury Department is officially in charge of government policy on the dollar, but it is becoming clear to investors that the Federal Reserve is in control of the greenback's direction currently, analysts said.
"For the time being it is certainly Federal Reserve policy that is driving the dollar, but the further the depreciation goes, the more likely the Treasury will become the bigger player in terms of stepping into the market," said Brian Garvey, senior strategist with State Street Global Markets in Boston.
"However I think we are way away from that," Garvey said.
One of the main factors driving the U.S. dollar lower in the past couple of years has been low U.S. interest rates relative to its main trading partners, with the benchmark inter-bank Federal Funds rate falling to a 45-year low of one percent, analysts say.
Why buy the U.S. dollar when you can get an almost equally safe return from non-U.S. government money market accounts that yield at least twice as much in Europe and in many cases far more?
Friday's dismal December U.S. employment report will likely further postpone any move by the Federal Reserve to begin raising interest rates in the wake of strong U.S. economic growth in the 2003, analysts said.
Only 1,000 new jobs were created in December, according to the U.S. Labor Department, way below market expectations for a jump of about 130,000 in U.S. non-farm payrolls for the month.
Employment therefore remains the weak link in the full recovery of the U.S. economy, despite GDP growing 8.2 percent on an annualized basis in the third quarter of 2003, analysts said.
"You still have the bears definitely winning the day, saying there's still a lingering worry on the economy," said Cary Leahey, the senior economist with Deutsche Bank Securities in New York.
"(Fed Governor) Bernanke has said the inflation rate is already at or below his comfort level. That combined with no job growth makes it harder and harder for the Fed to pull the trigger (on an interest rate rise) in an election year."
The dollar was swiftly punished in the wake of Friday's jobs data, falling to another life-time low against the euro around $1.2868 and dropping broadly against other major currencies, though heavy Bank of Japan intervention kept the dollar/yen rate steady around 106.40 yen.
Friday's jobs report also puts U.S. Treasury Secretary Snow in an awkward position, as he said in a Times of London interview in late October that he would stake his reputation on significant U.S. job growth by Christmas 2003.
Snow speculated job growth would average 200,000 jobs per month between the third quarter of 2003 and 2004. November saw just 43,000 new jobs.
However, U.S. Treasury Secretary Snow continues to repeat the administration's standard refrain that it believes in a "strong dollar" based upon market forces. Meanwhile, Fed policy makers defer publicly to the Treasury and refuse to comment on the dollar's decline.
Consequently, investors think Snow is just paying lip service to the idea of a "strong dollar" and instead looking to the Fed for direction.
"The market is looking to the Fed for the signal that the U.S. economy is fully healed and therefore it is unsafe to keep selling the dollar," said Greg Anderson, senior foreign exchange strategist at ABN AMRO in Chicago.
"By design, the Treasury has refused to give policy signals to the market throughout the whole Bush administration. And since they never intervene or give verbal signals, they are not looked to by the market for direction in terms of the valuation of the dollar," Anderson said. |
