Will the Fed Sacrifice the Dollar To Save the Markets?
The Dollar Index* is higher today than it was before the Federal Reserve launched a series of quantitative easing programs that involved printing over $4 trillion out of thin air in order to buy U.S. Treasury Bonds and mortgage backed securities from the too big too fail banks.
How did the Fed pull this off without causing a collapse in the dollar?
In the podcast below we show how Fed open mouth operations, yack attacks and coordination with other central banks keeps confidence in the dollar and demand for U.S. Treasuries elevated.
Dollar confidence and demand for U.S. Treasury bonds are two of the most important assets that the United States has and the Federal Reserve is entrusted with protecting both of them. Without foreign central bank demand for U.S. Treasuries, the United States could not conduct its welfare/warfare state deficit spending.
In this podcast we show why protecting or keeping the dollar in an acceptable range and demand for U.S. Treasuries high is more important than the Fed’s stated dual mandate of “maximizing employment, stabilizing prices and moderating long term interest rates.”
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A Dollar Not Too Strong, Not Too Weak
A dollar that is too strong makes exported U.S. military hardware too expensive for foreign purchases and dollar that is too weak can cause a lack of confidence in the dollar and can cause domestic inflation because the U.S. relies heavily on imports.
A point not made explicitly in the podcast – If an interest rate hike causes the equity markets to crash, demand for U.S. Treasuries will spike, thus furthering the Fed’s objectives of keeping demand high for U.S. Treasury bonds. (the plunge protection team/ESF can clean up the stock market mess if necessary)
Please have a listen and check out the charts and links below:
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Further Reading
Re the Petro Dollar Agreements – Why Saudi Arabia Matters in Helping to Keep the U.S. Dollar the World’s Reserve Currency
Why The Fed Raised Rates and Will Do It Again If It Has To
Yellen speech Monday June 6, 2016
The Dollar Index 2006 -2016
The Dollar Index hit a ten year high in early 2016.
The Dollar Index 1971-2016
The Dollar Index peaked in the mid 1980’s after the Fed raised interest rates and the economy recovered.
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*The US Dollar Index currently tracks the US dollar vs. the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona and the Swiss Franc. The Euro comprises nearly 58% of the index.
Dollar Index charts courtesy of Nick Laird at Sharelynx.
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