Reply #45: Dollar Defies Greenspan Fix [View All]

[54anickel]

http://www.thestreet.com/comment/aaronpressman/10196468.html

Federal Reserve Chairman Alan Greenspan and his fellow central bankers may bear some responsibility for the dollar's decline -- but don't expect them to do much to end the trend. After all, the Fed didn't cut rates to such historic lows because the dollar was overvalued. And now that the dollar is on the wane, they've got bigger problems to deal with.

In theory, the historically low short-term interest rates the Fed kept in place over the past few years should have prompted global investors to move money to countries where they can earn a better return. So with the Fed now raising rates and the economy still doing well, shouldn't the dollar rally as those investors are lured back?

It's not working out that way this time because, to borrow from the classic Terry Gilliam movie Brazil, there's been a little complication with the dollar's complications.

For a while at least, the "complication" of Asian central banks buying Treasuries limited the dollar's decline. Instead of converting trade surpluses back into local currencies by selling dollars, they kept their export bounty and amassed huge dollar reserves. Now that complication has developed a complication of its own as investors realized that central bank demand was hardly unlimited. Russia and China recently have given indications that they might be tiring of owning so many dollars.

"Interest rates aren't the only thing that matters," explained T. Rowe Price chief economist Alan Levenson. "It's the current account deficit and the fiscal deficit that have been exerting downward pressure."

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