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FT.com / Columnists / Martin Wolf - Why America is going to win the global currency battle

The cries of pain now heard around the world, as markets push currencies up against the dollar, partly reflect the uneven impact of US policy. Still more, they reflect the stubborn unwillingness to accept the needed changes, with each capital recipient trying to deflect the unwanted adjustment elsewhere.

To put it crudely, the US wants to inflate the rest of the world, while the latter is trying to deflate the US. The US must win, since it has infinite ammunition: there is no limit to the dollars the Federal Reserve can create. What needs to be discussed is the terms of the world's surrender: the needed changes in nominal exchange rates and domestic policies around the world.

If you wish to understand how aggressive US policy might become, read a recent speech by William Dudley, president of the Federal Reserve Bank of New York. He notes that "in recent quarters the pace of growth has been disappointing even relative to our modest expectations at the start of the year". Behind this lies deleveraging by US households, in particular. So what can monetary policy do about it? His answer is that "very low interest rates can help smooth the adjustment process by supporting asset valuations, including making housing more affordable and by allowing some borrowers to reduce debt interest payments. Beyond this ... to the extent that monetary policy can `cut off the tail' of the distribution of potential adverse economic outcomes ... it can help encourage those households and businesses with money to spend to do so".

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Oct 13th, 2010 at 04:06:10 PM EST
[ Parent ]
Funny how when the euro was going down it was the eurozone collapsing, and when the dollar is going down it's the US winning the currency wars...

Wind power
by Jerome a Paris (etg@eurotrib.com) on Thu Oct 14th, 2010 at 03:28:47 AM EST
[ Parent ]


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