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There has been a lot of speculation about the possibility of currency intervention in the USD. In the past year alone, the USD has fallen 15 percent in value against the EUR, 18 percent against the Swiss Franc and 13 percent against the Japanese Yen. Over the past 3 years, the decline has been more than 25 percent. Interestingly enough, the prospect of intervention is more real than it was back in April, when the USD hit a record low against the EUR. What changed? Inflation.
Last week, oil prices climbed to an all time high of $139.12 a barrel, sending inflationary pressures skyrocketing. Central banks around the world turned aggressively hawkish as the threat of higher prices solidified their need to focus on containing price pressures. Even the Bank of Canada has succumbed to higher inflationary pressures - they were widely expected to cut interest rates by 25bp this morning, but they opted to leave interest rates unchanged at 3 percent instead.
Clear and Cohesive Message from the Bush Administration: Stronger Dollar
Over the past week, the Bush Administration has sent a surprisingly clear message to the markets about where they want the dollar to head. The comments from 3 important people represent clear cohesion within the Administration, who has come out with all guns blazing:
1. Last Tuesday, Federal Reserve Chairman Ben Bernanke broke from tradition and talked about currencies. He drew links between the weaker dollar and higher import costs and consumer price inflation. His cohorts including Fed President Geithner confirmed that the central bank is paying “very close attention” to the value of the dollar.
2. On Monday, US Treasury Secretary Paulson said that he would not rule out any policy tool including currency intervention
3. Last night, on Airforce One, President Bush told The Times of London that “we want the dollar to strengthen.”
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Posted on Jun-12-2008
