The dollar, until recently seen by many as headed for oblivion, has rallied, breaking below the 1.40 level against the euro. The surge upwards of oil and commodity prices has been curbed. What lies behind all these moves is the belief that the Federal Reserve’s extreme efforts have begun to work – and that its money printing press might make a welcome return to a locked cupboard.
Until recently, the dollar was deemed unsafe because US policy undermined it. The Fed’s rapid expansion of its balance sheet to over $2trn and, in particular, its plan to purchase $300bn in Treasury bonds with freshly created funds, alarmed investors, who feared further dollar depreciation and monetization of the US’s fast-rising debt.
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The recent rise in US Treasury yields exacerbated the fears. The danger the market saw was that the Fed would print still more money and buy still more Treasuries – one bank suggested $1trn worth – in order to drive yields back down and foster a recovery in the housing market.
Fortunately, the Fed’s own counsel looks wiser. Janet Yellen, the San Francisco Federal Reserve President, suggested last week that if growth and fears of money printing and inflation are driving up yields, the Fed would need to change course. With economic decline giving way to stabilisation and perhaps recovery, the Fed is unlikely to expand its balance sheet further.
On the contrary, markets are starting to price in an increase in the policy interest rate before the end of the year. In contrast, the European Central Bank and the Bank of England are still considering whether to add to their own quantitative easing.
The dollar is likely to benefit. It could soon be challenging the 1.30 mark. In turn, the recent steep rise in oil and other commodities – in part speculation against dollar weakness – could be reversed. That would assist recovery in the west and help to avert an inflationary surge.
Gold, the ultimate hedge against debauched currencies, has fallen back to $946. A little more confidence in the dollar has robbed even it of its shine.
