US Dollar And Gold Update: Is The Fed’s Monetary Policy Devaluing The Currency?

The US dollar resistance at $94.60, which I pointed out a while back, has held well. I thought we might get a push up to $95.70 on the election aftermath, but the outcome turned out to be better than expected (from a strictly a markets and uncertainty elimination standpoint).

Dollar weakness in the short term looks like we may get a push back down to $91, and if that fails, back down in the range of $88.70 – $89.56. This would actually be a short term boost to earnings for multi-national corporations, as they covert their overseas earnings back to USD.

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I also want to quickly address a point regarding the Fed and the US dollar. To say the Fed is intentionally crashing the US dollar seems misguided. The above chart of the Dollar shows when the first QE program was announced on November 25, 2008, the Dollar value was at $85.

Over the proceeding 12 years, the Fed would go on to do QE 2, 3, and then 4 in response to COVID. The size of the Fed’s balance sheet increased from about $1 trillion to almost $7 trillion during this time. Yet, today the value of the dollar is about 9% higher than it was when QE began.

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Even the trade-weighted US dollar is higher than it was when this massive monetary experiment began.

Part of the reason for this is that QE is not really “money printing”. The Fed swaps bank demand deposits for bonds with banks. Technically, no new financial assets are being “printed”. The composition of those assets are being changed. And since demand deposits aren’t lent out, it's not creating the inflation that many predicted. This is being done to satisfy the market's demand for safe dollar denominated assets. Yes, the Fed is increasing the supply of dollars (M2), but it's in direct proportion to the increase in demand for those dollars. If the demand declines (velocity of money increases), while the Fed is still increasing the money supply, then that’s when real inflation begins. So far this hasn’t happened, but that is why I’ve stated before that the Fed’s biggest concern is ironically a strong return to confidence (so demand for safe dollar assets declines significantly), because then they will have to tighten policy or risk inflation and serious currency devaluation. And tightening policy could end up causing the financial disruptions that it has tried so hard to avoid.

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