Interest Rate Roundup

Tuesday, October 20, 2009

Canada, Europe, Brazil, Australia ratcheting up currency warnings

Our "What me, Worry?" Fed Chairman Ben Bernanke may not care about the falling dollar. But foreign central banks are getting seriously peeved about the strength in their currencies against the ever-depreciating dollar ...

* The Bank of Canada released a statement today saying that "heightened volatility and persistent strength in the Canadian dollar are working to slow growth ... the current strength in the dollar is expected, over time, to more than fully offset the favorable developments since July."

* European Central Bank President Jean-Claude Trichet warned again about "excessive volatility" in exchange rates, while a French economic advisor said the current EURUSD exchange rate is a "disaster for the European economy."

* In Brazil, the carry trade (borrow cheap dollars, invest the money in higher-risk, higher-yield assets) is so out of control the government just slapped a tax on foreign investors in Brazilian assets. A 2% levy will apply to foreign purchases of Brazilian fixed-income securities and stocks, effective immediately.

* Minutes of the latest Reserve Bank of Australia meeting showed that officials were very concerned about the side effects of recklessly easy money. The minutes suggested that a "very expansionary setting of policy was no longer necessary, and possibly imprudent." The RBA surprised the world recently by becoming the first Group of 20 central bank to raise rates, albeit by a quarter point to 3.25%.

Bottom line: Washington doesn't care about letting the dollar circle the drain. The Fed may want to keep U.S. rates at effectively zero until the next millennium. But Canada doesn't much like the surging loonie, the ECB hates the euro surge, Brazil isn't thrilled about the exploding real, and Australian officials are clearly firing a shot across Bernanke's bow.


  • Canada, Europe, Brazil, Australia et al are jawboning the weakening $USD but its only noise at this point because they granted the US and its currency de facto global seigniorage many years ago and, noise aside, that's pretty much the way they wanted it until the US said it was time to pay the piper: They'll pay alright and pay more still if they want out of the bargain they implicitly struck by setting their pegs and trade settlement regimes. TANSTAAFL; so what else is new?

    Shorter version, as things stand now, they buy the dollar and the US wins or they sell the dollar and the US wins; e.g.,

    And that is how it should be: Even a semi-reliable media of exchange and/or storage of value will not come cheap in a world where trust is in short supply.

    By Anonymous RW, at October 21, 2009 at 12:47 AM  

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