2 years, 2 months ago
Will the Fed's 2010 decision to keep interest rates low for banks allow the Euro to gain in strength against the dollar?
Should interest rates start climbing in a move to strengthen the dollar and preserve its leadership as the world reserve currency?
The Fed will keep interest rates between 0 and 0.25 percent.
The Fed will keep interest rates between 0 and 0.25 percent.
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In 2009, China claim stable levels of inflation
China’s M2 money supply is $8.57 trillion, as of Sep 2009. CPI and PPI are showing moderate increases.
(http://news.xinhuanet.com/english/2009-10/22/content_12298725.htm)
Sudden changes in US consumption could be disasterous
As the dollar depreciates many Central banks will switch from dollar assets to assets denominated by other currencies. The bulk sale of US treasury securities will cause bond prices to decline and yields to increase. If GDP drops as a result of the sudden change in Chinese foreign reserve accumulation of US treasuries then the dollar will devalue more rapidly and as consumption decreases then recession sets in. The drop in bond prices will cause the prices of stocks to fall. Stock prices during inflation are overbought. Debtors and creditors would face insolvency, as they would be unable to collect their debt. Chinese product prices would adjust upward. Sharp increases in Chinese product prices would send manufacturing back to the US. (http://www.semp.us/publications/biot_reader.php?BiotID=520)
2010 should have marked the beginning of rising interest rates. The Fed is betting that inflation will remain low. As rates rise, the dollar increases in strength, money supply contracts, and government spending slows. As banks shed government debt financing more credit becomes available for businesses.
1. With the Fed taking a position of low interest rates the dollar fell against the euro. The low Fed rates will allow the Euro to gain in strength against the dollar. More foreign currencies including the yuan will flow into the Euro helping it gain strength and position as a world currency.
2. Stephen Gallo is predicting a pullback in the dollar in the second half of 2010. The dollar dropped to $1.3768 euro. Goldman is recommending to investors that euro will reverse some of its decline. The Canada dollar rose to $1.0156, the strongest since 2008. The Yen rose to 91.52 gaining strength against the dollar as the Fed indicated interest rates. (http://www.businessweek.com/news/2010-03-12/yen-drops-to-2-week-low-as-kan-says-intervention-is-an-option.html)
3. Germany is being asked to help Greece with loans and guarantees totaling $27 billion. Derivative traders still believe the euro will slump even with financial aid to Greece. The solutions are perceived to be short-term solutions to a long-term problem. (http://www.businessweek.com/news/2010-02-22/yen-drops-to-2-week-low-as-stock-gains-reduce-demand-for-refuge.html)
4. The fed is betting that inflation will remain subdued. Will the Fed expansive monetary policy allow inflation to creep back? Since 2008, over $2 trillion have been put into the economy. The Fed will be behind inflation when it starts to raise rates assuming 2% inflation, today. The Fed is finishing purchasing of $1.25 Trillion of Mortgage Backed Securities and $175 billion of agency debt and interest rates should start to rise. (http://www.nuwireinvestor.com/articles/federal-reserve-risks-inflation-by-keeping-interest-rates-at-record-54527.aspx)
5. Growth is uneven across members of the eurozone. The ECB is sending no signals that it will increase interest rates. (http://kv4.net/tag/euro/)