Since 2005, the
Source: data from Federal Reserve Bank of St. Louis
There are three culprits of the depreciation US$:
- The slowdown of the
- The rising price of crude oil.
- The Fed’s decisions to lower the interest rate.
1. Foreign investors became nervous about
2. The rising price of crude oil has had a significant impact on the value of the
3. Recent actions by the
- The Fed lowers its target rate in order to stimulate a similar downward-momentum in other rates that apply to businesses and consumers.
Saving rates fall, car loan rates fall, mortgage rates fall, and consequently, people save less and buy more cars and more houses, etc. This is good for the economy if it is in a rut. Likewise, lowering the federal funds rate also causes foreign investors to sell off US$. As saving rates fall with the lower interest rate, foreign investors pull out of the U.S. financial markets, dragging down the value of the US$.
The only way to counteract the Fed’s cause of the falling US$ is for other key economies to lower their target rates as well. For example, if the European Central Bank (ECB), the central bank of the Eurozone, lowered its target rate, then there would be no need for investors to move money from the
The Bank of England has lowered its policy rate, but just by 0.75% since March 9, 2007. The ECB has been reluctant to lower its rate, sticking with 4.0%. But this is not enough. If growth in these economies suffers, then the central banks may be forced to lower their target rates. Unfortunately, growth is stronger than expected in the
The Fed lowered interest rates too much. It certainly has control over their policy rate, but has no control over the price of oil or growth of key foreign economies. It was just too much.
economy improves significantly – unlikely for a while (at least into 2009) U.S.
- The pressure on the price of crude oil falls – unlikely for a while (perhaps back to $100/barrel by the end of 2008).
- A global economic slowdown occurs – not looking good.
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