What Happened to Bernanke's 'Plan' to Depress the Dollar?

U.S. dollar signsOnly a month ago, many commenters attacked Fed Chairman Ben S. Bernanke for trying to push down the dollar's value. But surprise! -- the dollar has actually strengthened against its major rivals since the Fed announced its plan to start buying Treasury bonds again as part of its second round of quantitative easing, or QE2. Of course, that may not please U.S. companies that were hoping for an export bonanza.

Bernanke began hinting as long ago as August that the central bank would launch QE2 , with the goal of forcing long-term interest rates lower and thus stimulating the U.S. economy.

But critics railed at the policy's likely impact on the dollar. Former Fed Chairman Alan Greenspan complained that America was "pursuing a policy of currency weakening." A group of conservative economists published an open letter in The Wall Street Journal warning that the asset purchases "risk currency debasement." Multimillionaire investor Jim Rogers said even his four-year-old daughter knew "they are debasing the currency."

More Talk of a Euro Crackup

The Fed announced QE2 on Nov. 3, but a funny thing quickly happened: Interest rates on long-term U.S. bonds, which are set by the market, started to rise, not go down. Likewise, the euro has fallen about 10 U.S. cents against the dollar in the interim. In fact, in just the past few days the euro has retraced about 50% of the gains it made in a rally that began in June.

The prime mover seems to be the uncertainty in Europe over the bailout of Ireland and the implications that rescue holds for other so-called peripheral European countries with dicey economies, mainly Spain and Portugal. The blogosphere was full of commentary Monday about how the euro is headed for a crackup, similar to language last heard in May, when the European Union and the International Monetary Fund had to ride to Greece's rescue.

"I think the dollar strength you've seen in the last two weeks has really been very closely related to the risk aversion driven by tension in Europe," says Jens Nordvig, global head of foreign exchange strategy at securities firm Nomura International.

Nordvig says Nomura now has a risk premium of about 11% on the euro, up from zero in the summer. That means without the current crisis in Ireland, the dollar would be trading above $1.50 to the euro. Instead, it's trading at about $1.31.

Additional Factors

Nordvig says the additional concern surrounding the tensions between North and South Korea has only added to the flight to safety. "That has stalled the trend toward dollar weakness versus Asian currencies, and it's reasonably clear that it has just added to the overall risk aversion and the flight into dollars again," Nordvig says.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, says the U.S. economy is another factor. "Europe is the larger driver right now, but I would not underappreciate that U.S. economic data has generally surprised on the upside for the past month," Chandler says. "Not only have German interest rates fallen, but U.S. rates have risen."

Chandler says he expects further declines in the euro: "The dollar is always a safe-haven currency, and I suspect there's more to come even though the euro has come down a long way already."

He says he had forecast that in the second half of the fourth quarter, he saw the dollar recovering as uncertainty around fiscal policy -- namely, the U.S. election results -- passed and U.S. economic data edged up.

Nordvig says yet another factor supporting the dollar was the large number of investors who had short positions in the currency -- meaning they had bet that the dollar would go down. As they unwound those positions in late October, that had the effect of causing the dollar to rise, he says.

While the strengthening dollar is great for those planning a Christmas visit to Paris, it also has a downside: Many U.S. manufacturers had been counting on a cheaper currency to help them boost sales abroad, particularly in Asia, where they compete fiercely with European exporters.

President Obama has vowed to double U.S. exports in the next five years, but if the dollar continues to strengthen, reaching that goal will be increasingly unlikely.

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Rockett Singh

Someone should sick their lawyers on Bernanke, to purposely try to lower the value of the dollar should be a federal offense! Here in newmarket, we would never allow something like that to happen! http://www.leokinahan-criminallawyer.ca/

June 24 2011 at 11:50 AM Report abuse rate up rate down Reply

US dollar is deflating. FED's printing is not enough to bring it's value down. Most of our money supply is credit. It is not printed money. If credit deflates, it will be deflation. FED rate is at 0% and some people are worried about inflation that may come as the recovery takes hold. Some other people believe deflation is the problem and FED rate should stay at 0%. So, is it really the FED who sets the interest rates in an economy? Utimately, FED does not control the interest rates. The market does. During inflationary boom, due to demand for money, interest rates rise. FED follow the market by adjusting the FED rate. Central banks simply follows the markets. They don't direct the markets. http://www.tradingstocks.net/html/central_banks_move_the_markets.html Social mood directs markets, economy, politics, and the culture. The economic cycles or business cycles such as Kondratieff Wave ( http://www.kondratieffwavecycle.com/kondratieff-wave/ ) are created by the herding behaviour of the people. When Kondratiev Winter ends and spring starts, people look at each other and start expanding their businesses and investments just because others are doing so. Credit supply increases dramatically. Then expansion levels out and that is Kondratiev summer.This brings prosperity. Then the bill comes due and the debt must be paid off. Since everyone started at the same time, they all start paying off debt at the same time. This alignment of the entire population causes a major problem. In order to pay back debt, they reduce expenses, scale back new investments. Expansion stops, Contraction starts. When the debt is paid off, the money dissapears just the same way it was created by the banking system. This shrinks the money supply and Kondratiev Winter holds a strong grip on the economy. Once the debt level reaches reasonable levels, Winter ends and recovery, aka Spring starts again. FED can influence this by changing who pays for the bust ( they may print money at savers expense) or the FED can make it easier for the banks to lend and this only makes the bubble bigger. FED's primary job is to faciliate credit. It is not to print money: http://www.tradingstocks.net/html/understanding_the_fed.html That is what we had after 2001. Credit expansion reached excessive levels. Greenspan encouraged lending, and banks went along. But now the music has stopped. Here is why FED's credit inflation does not last forever: http://www.tradingstocks.net/html/jaguar_inflation.html After prime borrowers, we went through sub-prime, and now we ran out of people who can borrow. This is the end of the ponzi scheme. The music has stopped. FED can keep rates at 0% and inflation will not happen as long as credit continues to deflate. Once deflation ends due to low debt levels, inflation can start again and then maybe, just maybe, the next credit bubble can inflate faster (with higher inflation) if FED keeps rates low. But until then, it is not upto the FED to create inflation. It is the aggregate social mood who will decide it is time to do so.

December 01 2010 at 12:39 AM Report abuse rate up rate down Reply


November 30 2010 at 7:04 PM Report abuse rate up rate down Reply


November 30 2010 at 7:01 PM Report abuse rate up rate down Reply

Mr. Wallace: You write a good, but (for myself) a complex article. My comment is as folows: In the bond market the aphorism to buy low and then sell high also does apply (to the PRICE you pay for the bond). As you (and others) are totally well aware, that means you profit from buying (preferably high quality) bonds when INTEREST RATES are relatively high and (if you are not interested in "clipping coupons" you) sell the bonds when INTEREST RATES are low. QE2 requires the sale of 600 billion dollars of bonds. In addition to the fact that some bond traders may wish to "front run" the sales, China, Japan, South Korea (etc.) may now be interested in purchasing our bonds ONLY when interest rates become higher. And also, the old paradigms in our (U.S.) bond market MAY be in the process of shifting (we read article after article explaining why) and the ripple effect of this might posssibly explain some of the questions you pose.

November 30 2010 at 5:50 PM Report abuse rate up rate down Reply
1 reply to bfpowersjr's comment
Robert & Lisa

Actually sir, QE2 does not require the sell of bonds. That's the beauty of it for Obama and thugs. They just printed the extra money...

December 01 2010 at 12:37 AM Report abuse +1 rate up rate down Reply

Just to be fair the dollar is plenty weak and the reason the dollar looks strong is because the euro and the yen are not looking to good so its more a reflection of other currencies.

November 30 2010 at 4:37 PM Report abuse +2 rate up rate down Reply

So much for gravity! Tell me why do tree's & houses stay down & not float away in the breeze? Yes we survived another day but the piper will be paid! BY YOU!

November 30 2010 at 3:36 PM Report abuse +3 rate up rate down Reply

It just cracks me up the amount of financial "EXPERTS" we have in this country. Too bad about their common sense and inability to run a responsible financial system! I think a good electroshocking followed by the educating them on the value of "LIVING WITHIN BUDGET", LIVING WITHOUT DEBT, USING MONEY BACKED BY GOLD (or something!), and re-introducing them to the concept of FISCAL RESPONSIBILITY. Ben Bernanke is especially hilarious, and one wonders why he hasnt been fired... or shot by some out of work American. The whole Federal Reserve is unconsitutional, and one big credit card that allows our government to get us into wars, bail out companies that couldnt compette fairly, and now, plan a health care system that is totally unnaffordable andcan NEVER pay for itself. Why if our government had to spend within its actual budget, we would be looking GREAT RIGHT NOW. But instead, we are bogged down in two wars we couldnt afford, and looking at a debt which may never be paid off. GOOD WORK ALL YOU FINANCIAL EXPERTS AND MBAs!

November 30 2010 at 2:07 PM Report abuse +1 rate up rate down Reply

A big factor in the dollar remaining its so-called strong statis is unemployment has remained the same for several months now. Without money to buy things and business needing people to buy things, business will either have to decrease the price on their items or fold up for lack of selling. Demand is there, but demand can only be accomplished if the money, or credit, is there for the items to be sold. Thus, as the price comes down, so-called "value" of the dollar goes up and remains strong. I think what was not anticipated was unemployment to remain so high for so long. Businesses themselves are mostly to blame for our dollar remaining strong. They just keep shooting themselves in the foot as long as they don't employ. Economics 101.

November 30 2010 at 1:34 PM Report abuse rate up rate down Reply

you need to listen to this vido of NIGEL FARAGE he tells it like it really is....i am tired of all the goverment plans to remove our job and our lives....this is why and this dear man tells them off...and concider it a warning to all of us ...keep you eyes and ears open don't fall for the crap the us and eu are trying to do to the USA. They have all ready been started for years on us just look at some of yhte bills that have been passed here , obama care is a big one ........the man is a true voice....... be afraid people be very afraid...... http://lawyers-law.com/nigel-farage-spells-out-the-eu-crisis/

November 30 2010 at 12:15 PM Report abuse +4 rate up rate down Reply
1 reply to Regina's comment

The web page no longer exist.

November 30 2010 at 3:13 PM Report abuse rate up rate down Reply