hat the stronger dollar means
“The dollar’s big bounce over the past week” against other major currencies, says David Bogoslaw in BusinessWeek.com, could either be “a sign of growing confidence in U.S. growth prospects,” or just expectations that things are getting worse abroad. The U.S. Federal Reserve and the European Central Bank both left interest rates unchanged last week, but investors are betting that the Fed’s next move will be a rate hike and the more nervous ECB’s will be a rate cut. That could explain the short-term strengthening of the dollar, but in the long-term analysts can’t agree if the dollar has hit rock bottom, or is just on a temporary rebound, aided by “momentum traders,” tough talk from the U.S. Treasury, and lower oil prices.
What the Fed’s rate cuts did, and didn’t, do
The dollar wouldn’t be so weak if it weren’t for the Fed’s year of “rather sizable” rate cuts, says Irwin Kellner in MarketWatch. The cuts, from 5.25 percent last September to today’s 2 percent, were designed to inject massive amounts of liquidity into the banking system, to avert a financial-market meltdown. These cuts had lots of effects—a sense of abetting moral hazard, higher commodity prices—but one thing they didn’t do is increase the “availability of money and credit for business and consumers.” In fact, the main beneficiary of the rate cuts appears to be the federal government, which “has to pay a lot less to sell its Treasury bills, notes, and bonds these days.”
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