The dollar has had much working against it in the past decade: roughly eight years of policy errors, an inability by public officials to recognize the mercantilism of major economic powers, and (until recently) a U.S. consumer unable to curb profligate spending habits.
But the buck has had one thing working in its favor: European Central Bank President Jean-Claude Trichet and the highly-diverse ECB Council have presented a less than picture postcard perfect monetary policy since the euro's creation. On Friday that ECB council rift reared its head again after Trichet failed to eliminate concerns about a split among the continent's monetary policy makers, Bloomberg News reports, and the dollar strengthened 1.5 cents to $1.3040 versus the euro -- a one-month high.
Cracks in "Fortress Europe"
Trichet said Friday that "ambiguity" among central bankers will delay the economy's recovery and undermine investor confidence, Bloomberg News reported. Germany, led by Bundesbank President Alex Weber, is against lowering short-term interest rates further, while Greece and other lesser-wealthy nations favor more rate cuts.
"Confidence today relies equally upon the audacity of our immediate decisions and upon the soundness and credibility of our exit strategies," Trichet said in a speech in Tokyo Friday, Reuters reported. Trichet added that policy makers must be sure that any financing structure of the euro-zone is fully in-line with the ECB's medium-term strategy.
The above comments were more than enough to convince currency traders -- at least for now -- that the ECB will not cut short-term interest rates by another quarter-point at its May meeting, and they sold the euro. The ECB has repeatedly said it will not cut short-term rates to near zero, as the U.S. Federal Reserve has done. Certain business executives and policy makers in Europe, and in the United States, have argued that the ECB's monetary easing to-date has been inadequate, given the scope of the financial crisis and depth of the recession.
Conversely, monetary and fiscal officials in the euro-zone's wealthier states, led by Germany and France, have countered that interest rate and fiscal policies have been sufficient, and that richer states can not be expected to subsidize the recoveries in less-wealthy euro-zone nations (such as Italy and Greece) and the development of emerging market economies in Eastern Europe.
Trichet's comments also helped build the case of the GDP bears, who argue demand in Europe is too weak to suggest a recovery any time in 2009. On Thursday ECB Council Member Nout Wellink, also Dutch Central Bank head, said the euro-zone economy had performed worse than expected in Q1, but that the negative trend was beginning to level-off, Reuters reported.
Monetary Policy Analysis: The above underscores why straight U.S. government spending/quantitative easing driving-a-fall-in-the-dollar arguments are simplistic. The dollar's value is not simply a function of dollars in supply: it's also affected by the monetary policies and economic strength of other major economies, in particular, Europe and Japan. Proof in point: in March, the Fed decided to buy longer-dated Treasuries, and many public officials (economic conservatives among them) argued this would 'flood the system with dollars, resulting in the dollar falling off a cliff.' But what's happened to the dollar since then? Not much: it remains stable against other, major currencies, in part due to the euro-zone's recession and the belief that its monetary policy rift will delay that region's economic recovery.