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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

October 14, 2010 at 2:50 PM

Helicopter Ben helps get the dollar chopped up in the currency markets

It was an interesting day in the currency markets, as in, “may you like in interesting times.” Rupert Murdoch’s Wall Street Journal had an online headline saying, “Specter of Stimulus Spurs Run From Dollar,” as if we’re to believe the socialist Comrade Obama will unleash a trillion dollars to build high-speed rail, research centers, renewable energy industries, productive infrastructure, job retraining and the like.

Dream on. The dollar was driven down by perceptions of large-scale QE — quantitative easing — by the Federal Reserve. Through its rococo mechanisms, the central bank essentially prints more money. This may make credit more available in the domestic economy — maybe — but it also destabilizes other currencies, especially those linked to the dollar, and risks devaluing dollar-based assets.

But more is going in. This is partly fallout from the failure of major nations to reach an accord on currencies, especially China’s unwillingness to join the free-market club. The result: Other nations are going their own way, too. Singapore tightened its monetary policy, making its dollars more appealing to investors who are worried about a de-facto devaluation here.

Nouriel Roubini’s firm Roubini Global Economics noted, “As global growth mostly stagnates, governments are increasingly focusing on monetary policy as a last resort to prop up ailing economies.” Ben Bernanke’s Fed and the Bank of Japan are in that camp.

In the other, Europe for now, and an Asia that increasingly looks to be fulfilling the prediction that its rebound would allow a decoupling from the West. And China, along with a few other adherents to its policy, which is keeping its currency artificially low to maintain its competitive advantage.

QE will only get Helicopter Ben so far, especially if deflation proves fleeting. American exporters may benefit. But there’s danger for the holders of dollars, whether OPEC or you. The difference is the former can change horses. On the other hand, with the American economy still stagnant, what to do?

Today’s Econ Haiku:

Nirvana returns?

But what about a come back

Of the bull market?

Comments | More in Dollar

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