Tags: Money | federal reserve | policy | foreign exchange | value

How Does the Foreign Exchange Value of the Dollar Relate to Federal Reserve Policy?

By    |   Thursday, 09 July 2015 06:48 PM

The Federal Reserve says over and over that its policy makers do not target any particular rate of exchange for the U.S. dollar against foreign currencies. Deciding the value of the dollar and other currencies against one other is what foreign exchange markets are for, says the Fed.

In a Q&A on the U.S. central bank's official website, there is an acknowledgement that Fed actions and dollar moves aren't disconnected: "[M]ovements in the exchange value of the dollar represent an important consideration for monetary policy — such movements exert influence on U.S. economic activity and prices and constitute one of the ways the effects of monetary policy reach the broader economy."

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All of which is the Fed's way of saying, yes, we have an impact on the dollar, and we're comfortable with that as long as you're clear that our focus is on the economy not the value of currencies.

An April 2013 report from the Federal Reserve Bank of San Franciso looked at the dollar's value abroad during the era of "unconventional monetary policy" and "policy surprises" brought on by the Financial Collapse of 2008.

After the obligatory disclaimer ("Although the Federal Reserve does not target the dollar … "), the authors wrote that the Fed's massive buyback of government securities — known as quantitative easing — "pushed down the value of the dollar" as much as would a pre-crisis surprise move, like making an unexpected cut in the federal funds rate at which banks loan money to one another.

"The value of one currency against another is in large part a function of central bank policies in each country," economist Mark Thoma wrote in an October 2014 op-ed for CBS News.

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In short, Thoma writes, low interest rates that might boost inflation will generally weaken a currency, and vice versa.

But Thoma notes that a currency's foreign exchange value is also a function of what investors think a central bank is going to do — hence, last fall's dollar rally against the euro and the yen, months before Federal Reserve Chair Janet Yellen said anything about finally raising interest rates.

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The Federal Reserve says over and over that its policy makers do not target any particular rate of exchange for the U.S. dollar against foreign currencies. Deciding the value of the dollar and other currencies against one other is what foreign exchange markets are for, says the Fed.
federal reserve, policy, foreign exchange, value
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2015-48-09
Thursday, 09 July 2015 06:48 PM
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