G-7 To Manage The Dollar Lower: It's A Dangerous Game 09/22
Over the weekend, the finance ministers of the top seven industrialized nations, known as the G-7, issued a joint communiqué, it said, "More flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the financial system, based on market mechanisms." Translation: We believe the dollar is too high and will act to manage it lower.
An orderly decline in the dollar could have significant economic benefits for the US. But the G-7 needs to be careful. It's always hard to manage a currency. In the complicated and convoluted world of global capital flow, an orderly decline can easily lead to a "free fall." And that's where the danger lies. A free-falling currency must be defended by the central bank. In order to defend the US dollar, the Fed would need to jack up interest rates. That would mark the beginning of the end in the US recovery and probably hammer the stock market as well.
Here's why the US wants the dollar to decline...
The massive US trade imbalance and soaring federal deficit makes the US highly dependent on overseas investors for funding. At current levels, the US needs to attract over $2 billion a day from foreigners to fund the deficit. If the deficit continues to grow larger, this funding gap will reach a dangerously unsustainable level. That could lead to an exodus from US assets. This is why Treasury Secretary Snow wants to push the dollar lower.
Over the weekend, the finance ministers of the top seven industrialized nations, known as the G-7, issued a joint communiqué, it said, "More flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the financial system, based on market mechanisms." Translation: We believe the dollar is too high and will act to manage it lower.
An orderly decline in the dollar could have significant economic benefits for the US. But the G-7 needs to be careful. It's always hard to manage a currency. In the complicated and convoluted world of global capital flow, an orderly decline can easily lead to a "free fall." And that's where the danger lies. A free-falling currency must be defended by the central bank. In order to defend the US dollar, the Fed would need to jack up interest rates. That would mark the beginning of the end in the US recovery and probably hammer the stock market as well.
Here's why the US wants the dollar to decline...
The massive US trade imbalance and soaring federal deficit makes the US highly dependent on overseas investors for funding. At current levels, the US needs to attract over $2 billion a day from foreigners to fund the deficit. If the deficit continues to grow larger, this funding gap will reach a dangerously unsustainable level. That could lead to an exodus from US assets. This is why Treasury Secretary Snow wants to push the dollar lower.
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