Jim Devine asks:
why hasn't the dollar been falling steeply? after all, Greenspan _et al_
have been cutting (short-term) interest rates pretty steeply.
=====
This has been bugging me for ages also, and seems to indicate a suspension
of what we thought were the normal rules of monetary policy following the
Friedman/Volcker ascendancy of the 1970s. The euro's fortunes here are
analogous, as relatively high rates have actually been blamed for the "poor"
performance of the currency relative to the US dollar and UK sterling, while
cuts supposedly would have strengthened it. Of course the timing of the last
rate cut was such that this was blamed for further decline in the euro's
value, i.e. it's Duisenberg's ineptitude that's causing the problem.
This doesn't really cut it as an explanation (sorry Doug), at least not
without further, stronger support. The whole debate seems to be built upon
false premises. Rational expectations supposedly rendered government/central
bank interventions utterly predictable, therefore their intended effects
were cancelled out by rational investors. But because "the markets" cannot
apparently fathom the decisions of Duisenberg et al. the latter are
"incompetent". What if Duisenberg were actually bluffing and
double-bluffing, ensuring the strong export-led recovery of the euro-zone by
maintaining a lowly valued currency because it's the investors who are
really the klutzes? (Gosh! Never! But ask Warren Buffett.) Pockets of
inflation aside (e.g. Ireland), the relative lack of inflationary pressure
within the eurozone (consistent with Roger Bootle's "Death of Inflation"
thesis) enables the ECB to do this.
Anyway, as for the dollar, doesn't capital flows still help to sustain its
level? And "the markets" appear to place more value in expected future
capital gains, themselves dependent upon US demand, rather than short term
interest rates. As long as the Fed/Treasury signals its commitment to
sustaining GDP growth levels, the dollar is likely to remain afloat. That
seems to be the intention of the policymakers anyway, as they try to protect
their house of cards. I think Jim O'Connor's analysis is helpful in
understanding the Fed's/US's predicament.
Michael K.
