By: Mike Campbell
Traditionally, the US Federal Reserve doesn’t often comment on the value of the US currency abroad. However, the value of the Dollar has dropped significantly against major currencies since the beginning of the year: Sterling (-15%), the Euro (-12%) and the Japanese Yen (-5.1%). Federal Reserve chairman, Ben Bernanke said "We are attentive to the implications of changes in the value of the dollar," and that the Federal Reserve would “help ensure that the Dollar is strong”.
Bernanke’s comments were perceived as an attempt to talk the Dollar up without actually making any direct intervention. There is concern in some quarters that the Dollar may go into “freefall” unless the Fed acts to support the currency. One factor which has led to Dollar weakness is undoubtedly the historically low interest rates that the Fed is offering. This is not the full picture, however, since the Bank of Japan, Bank of England and European Central Bank interest rates are also at, or near, historic lows as well. None of the major central banks are willing to raise rates just yet since more expensive borrowing might choke off their national recoveries – which is the obvious elephant right now.
The Japanese economy grew by 1.2% in Q3 although some analysts predict that Japanese growth will be sluggish for years to come on the back of the deepest recession in modern Japan’s history. The better than expected Q3 figures have been partially attributed to “cash for clunkers” schemes abroad which gave a boost to Japanese car exports.
The Yen was trading slightly lower against the Euro yesterday, but was marginally higher against both the Dollar and Sterling.