There’s a huge problem with the entire world trying to have weaker currencies relative to the dollar right now.
It’s that they’ve all become slaves to U.S. interest rate policy, even more so than they already may have been.
Right now, raising interest rates in any country before the U.S. does so is likely to strengthen that country’s currency against the dollar, all else being equal.
For example, Australia hiked its main interest rate to 3.25% from 3% early this month and the currency moved higher, both ahead of the hike, likely on anticipation, and then afterwards as well. There are many factors at play in currency markets, but higher interest rates make Aussie dollars even more appealing.
For countries with a strong desire to keep exports competitive, that’s a big problem.
Thus the Eurozone, the U.K., and most international countries have to decide whether their own fear of currency strength is worth the collateral damage it causes at home. Hopefully they are disciplined and don’t drag their feet to raise interest rates.
That’s because, right now, the U.S. fed is stimulating not only the U.S. economy with its ultra-loose policy, but that of any country who, for fear of its own currency strength vs. the dollar, hesitates to raise rates even though it should.
Should such gaming of the U.S. dollar for export competitiveness continue, get ready for even more asset bubbles around the world.
ECPulse: The major highlight for today in Europe is the minutes released by the Bank of England… The minutes will most likely reveal that the vote was unanimous on interest rates steady at 0.50 per cent, which is the lowest since the bank’s foundation, while the nine members of MPC are also with continuing their Asset Purchase Facility (APF) program.
The Australian: European policy makers have tried in recent days to jawbone the euro lower – and the dollar higher – but markets have largely ignored the rhetoric.
Reuters: Brazil’s central bank left its benchmark interest rate unchanged for a second straight meeting on Wednesday as it saw a recovery in Latin America’s largest economy take hold without yet driving up inflation…. Investors, however, have been pricing rate hikes into the yield curve as early as January 2010, despite protests by government officials that the rate need not change just yet.