Foreign Exchange Markets and Fed Policy

Free Exchange says:

Tim Duy gets results.
 

Comments

[hari]

I think I summarized the discussion in our previous thread;

Globalization has forced Fed into a role which was perhaps not intended - but as long as Treasury is not doing anything substantial to avoid further dollar devaluation, the question for China and Gulf States suffering under current inflationary pressure is going to come home and roost.

Of course, nationalism is central to how Treasuries move forward their own policy; BB has done something today which is beyond Feds remit (me thinks); ie. identified with ECB + rest of OECD block -> to target escalating commodity price movements and to contain galloping inflation.

This is not a technical issue; it's fundamentally the inter-linked global political economy which is at stake right now.

[hari]

My guess is that when CFTC finally releases its on-going internal findings on commodity *bubble*, and how it was manipulated by *insiders*, it will impact spot prices immediately. The fact that CFTC has gone public about its investigation has already restrained actual volume of trade in basic commodities. US Cotton is also involved here....

Recall commodities trade is roughly about 10% of total market tunover daily - therefore 90% are non-commodity trades.

My q's is about SWF and their savings glut - where do they deploy those $Trillions held on mainland China and Gulf States? Paulson is right now in Gulf region speaking about the issues but there is very little detailed reporting of local feedback. Arabs Scheiks are notorios gamblers and I'd not be surprised they're using market opportunities to pile up on commodities.

[Eric Dewey]

Hari, do you think BB's acknowledgement today is sufficient to persuade China and Mideast governments to slow their movement away from US Treasuries?

Or, do you think that those governments may feel BB's statement to mean they have been successful in persuading the US to take concrete action in support of the dollar (at least as much as Tim Duy)?

[don]

I wonder. The dollar's drop against the euro increases import prices denominated in dollars, but allows euro-denominated prices to remain steady. A country that pegs its currency to the dollar will tend to import inflation, which will also feed back to U.S. import prices. So, I'm not sure that the 'reserve currency' role of the dollar is that critical when looking at the effects of expansionary U.S. monetary policy on inflation. By helping maintain growth in China, though, the expansionary monetary policy pushes up global demand for food and oil, and these relative price increases are proving bothersome.

[hari]

Eric Dewey - good question.

Let say, Fed action more or less pre-empts lack of Treasury action on dollar devaluation ...and reinforces likely scenary of BO defeating GOP next Nov. Paulson is not going to rock the boat for GWB/WH - he's already done enough to give Fed substantial role in regulating hedge funds and investment banks.

For mainland China, dollar devaluation is not only a disincentive but politically inflationary as oil prices impact China's domestic variables. Already EU has replaced US as main trading partner of China...and there're serious discussions on-going to align Yuan valuation against Euro.

Current currency movements is a reflection of Paulson's Treasury doing almost nothing to impact dollar devaluation...until BB intervention (yesterday) via videolink to Madrid bankers meeting.

I've a feeling Fed/ECB technical staff are also cooperating on getting a handle on price stability across the Atlantic.
Euro/Dollar spot price around 1.5 is OK going forward - which means a lot more policy coordination required to blunt commodity prices and especially food prices in EU.

Nov Election is setting the agenda and Paulson may've seen the writing on the wall and therefore Feds assertive role in attacking not only dollar devaluation but also finding ways and means to blunt commodity (food) prices. Oil prices are likely to go south after summer holidays, me thinks.

Thus inflation becomes a focus of both Fed/ECB....and FT is now ganging up on UK/BoE to adopt Euro (which will not happen) if Lon wants to remain global centre of international finance and specially hedge funds and whatnots....