Friday, February 27, 2015

The Surge in the US Dollar

Jim Rickards, author of Currency Wars and The Death of Money,says the expectation of rising rates in the US is one reason behind the surge in the US dollar of late. However, the US Fed doesn’t want a strong dollar because it’s deflationary. One of the Fed’s primary policy objectives is to hit 2% inflation. It’s not getting it.

Neither is the European Central Bank. The Financial Times reported yesterday that there are now 1.2 trillion euros in Eurozone debt that have a negative yield. Investors are effectively paying to hold short term government debt.

The problem for the Federal Reserve is, if it raises interest rates now, it makes the US an even more attractive target for capital. Investors get a higher return than in European debt and a strengthening dollar as well. Rickards conclusion is that the Fed will therefore not raise rates in 2015. This goes against the idea that the Fed is set to return them to ‘normal’ levels.

- Source, Daily Reckoning