Fed Moves Viewed as Targeting The Dollar
By TOM LAURICELLA
The Federal Reserve minutes released Tuesday left currency investors with two take-aways: U.S. officials are determined to push the dollar lower, and the griping from everyone else is likely to continue.
The minutes, which showed surprisingly broad support among Fed policy makers for a stimulus effort, erased a mild bounce the dollar had been enjoying.
The currency approached a new 15-year low against the yen. The euro, meanwhile, rose from Monday's $1.3873 to again close in on $1.40.
Most of the world's finance ministers have so far shown little inclination to manage the dollar's decline on a coordinated basis. In the same breath, however, they are decrying competitive devaluations—when countries all fight to drive their currencies lower.
But the reality on the ground hasn't matched the rhetoric: Thailand's government Tuesday approved a series of measures aimed at containing its currency's rise, the latest among a string of countries from Japan to Brazil seeking to stem the ascent of their currencies.
And as far as the U.S. is concerned, players in the currency market see the Fed's expected new round of quantitative easing as aimed at resulting in a weaker dollar, even if officials haven't said that is the goal. By pumping more money into the financial system, the Fed would essentially be diluting the value of the dollar.
Investors increasingly believe the U.S. is putting itself at the forefront of the competitive devaluation race. That view is driven in part by the Treasury's increased pressure on China to allow its currency to rise against the dollar, which would likely result in the dollar falling against a range of other emerging-market currencies.
"The U.S is saying, 'These bad Brazilians, these bad Japanese,' " for wanting their currencies to fall, said Axel Merk, chief investment officer at Merk Investments. "But it's the U.S. that is actively working on engineering a cheaper dollar."
Steven Englander, currency strategist at Citigroup, says that while U.S. officials would want to avoid a dollar drop that destabilizes the stock or bond markets, "if the dollar dropped 1% a month for the next 12 months...they wouldn't think that is a bad outcome."
Some traders have been saying the dollar's recent decline was looking overdone. Since early June it has fallen 13% against a broad basket of currencies known as the U.S. dollar index. But bearish sentiment on the dollar was revived Tuesday afternoon. While the markets were already expecting the Fed to ease policy through purchases of U.S. Treasurys, the Fed was shown to be considering other steps to have a bigger impact.
At the same time as the interest-rate climate in the U.S. is putting downward pressure on the dollar, the U.S. government has stepped up its efforts to get China to allow its currency to rise. While there was little broad consensus on currency issues at last weekend's International Monetary Fund meeting, other countries joined in the criticism of China's policies.
With the U.S. keeping the pressure on China, the yuan has risen about 2.3% since June 18, the bulk of that move coming in the past month.
In late trading Tuesday, the euro was at $1.3916 from $1.3873 late Monday. The dollar was at 81.85 yen from 82.12 yen, while the euro was at 113.91 yen from 113.92 yen. The pound was at $1.5800 from $1.5872. The dollar was at 0.9569 Swiss francs from 0.9644 francs.
The growing sense that the U.S. is seeking a weaker dollar flies in the face of the official statements in the wake of the IMF meeting. "We don't need these competitive devaluation of currencies. It's not a good policy, it's not going to help the world economy, and it's not going to create confidence in terms of growth," Ireland's Finance Minister Brian Lenihan said in an interview Monday. "Manipulating a currency to give some sort of competitive advantage is a lesser form of trade war, but it's still a trade war," Mr. Lenihan said.
On Tuesday, Brazil's finance minister complained that U.S. and Japanese economic policies are fueling a flight of money out of their currencies into emerging markets, and called for an effort to coordinate currency policies at the G-20 meeting later this month in South Korea.
Meanwhile, Thailand's cabinet on Tuesday approved a series of measures aimed at containing the baht's rapid appreciation and aiding private businesses hurt by the currency's rise, including a plan to reinstate a 15% withholding tax on foreigners' investments in Thai bonds. The Thai baht has risen about 10% this year.
"Ultimately, every country is going to act in what they perceive as their national interest," said Mr. Merk.
—Piyarat Setthasiriphaiboon contributed to this article.
Write to Tom Lauricella at tom.lauricella@wsj.com |
