Bernanke Talk Fails to Support US Dollar
The forex market give Bernanke and the US government clear notice last week that it will take more than talk and a few speeches to improve the prospects for the US Dollar.
The Euro closed the week at 1.5625 against the beat up Dollar after trading as low as 1.5300 immediately after Bernanke’s remarks that the Fed would be paying more attention to inflation. The Yen strengthened to finish the week at 107.25 after trading as low as 108.55.
Dollar bears are not impressed with what Bernanke and company at the Fed say about supporting a strong Dollar. And they are even less impressed at Secretary of the Treasury Hank Paulson’s frequent announcements that the US supports a strong Dollar policy. Forex traders think of Paulson’s pronouncements as more of a long running bad joke than a serious statement of US Dollar policy. It will take strong vigorous action on the part of the Fed to keep the Dollar from really tanking as 2008, the year from Hell, roars on by.
But what is the Fed to do? US policies over the past many years have lead to a weak economy and rapidly increasing prices. The situation is even worse than stagflation as it appears that the economy’s weakness will turn out to be more than that. Prospects for a rapid recovery in economic conditions are not good and things could become much worse. The “D” word has to be entering at least the back of the minds of businessmen and homeowners.
If the Fed makes a real effort to increase interest rates that will probably be a knockout blow to the economy. However, if it does nothing, or raises interest rates by just a little bit, say a quarter point, the markets will likely panic anyhow as that would indicate that the inflation rate is not getting the attention that will be required to bring it under control.
In my opinion, the perfect financial storm is underway. It is already too late for the Fed or anyone else to do much but try to hold on. If you are still in the stock market you are either a brave or foolish soul, perhaps both. It will be tough swimming against the financial tide that is gathering strength and headed for your stock portfolio.
As for the forex market a rapid very frightening free fall of the Dollar is probably in the works this year. While the volatility will likely continue to be great the long term direction looks to be clear unless the Fed finds the backbone to raise rates aggressively and let the economy have the recession that is probably already here by common sense measures. In an election year it is highly unlikely the the Fed will act to take the edge off inflation, that is until it is too late and emergency conditions scare Bernanke and Fed board members to act to aggressively raise interest rates even if the Whitehouse is screaming, no, no, no.
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