New talk from the Bush Administration about wanting a strong dollar, has fueled speculation that Washington will intervene in the markets to support the U.S. currency, but analysts say such a move is both unlikely and impractical at this time.
“Ideally they would like to see more strength in the dollar than we are seeing now and for it to stop declining but the fact of the matter is that as long as we are in a rate-cute mode, I don’t see that happening,” said Rick Pendergraft, a market expert and editor-in-chief of the newsletter Investor's Daily Edge.
The Fed’s policy of lowering interest rates to head off a recession hurt an already weak dollar, which has been hitting record lows against some major currencies for several years.
“As long as we cutting rates to try to improve the economy, we are making the dollar weaker – they can talk all they want but these are simple economic factors.”
With the Fed’s FOMC expected to cut the federal funds rates another half or three-quarters of a percent at its meeting next Tuesday, more dollar declines are likely.
What may be seen as the Bush Administration’s latest effort to talk up the dollar came Thursday after the US currency sank below the psychologically important level of 100 Japanese Yen.
The situation worsened Friday, following the Fed’s bailout of Bear Stearns. The dollar fell to 1.5688 against the Euro, making it worth half as much as it was in 2000. The dollar also went through parity against the Swiss franc.
“This is all talk and no action,’ adds Robert Brusca, chief economist with FAO-Economics. “I think this administration is pretty much against using intervention – it’s non-interventionist, you don’t intervene in the foreign exchange market.
Currency market Intervention has been quite rare in recent years and has been largely the province of the Bank of Japan, which struggled to support the yen during a decade-long period of recession and deflation.
“You may get the Bank of Japan trying to do something but I really don’t see the Treasury going all with that – at least not now,” said Brusca.
If the BOJ is worried, the European Central Bank may be even more concerned, as the weak dollar is cutting into exports at a time when economic growth is slowing.
Analysts say intervention is rarely effective, but when it is it is usually the result of coordinated action by the major central banks in a concentrated fashion over a relatively short period of time.
“The Fed can try and intervene but I don’t think that the dollar can get any stronger and reverse course until we see our economy strengthening and that’s just not in the cards until the housing market turns around,” added Pendergraft.