Tags: dollar

Weak Dollar Not Good News to Central Banks

By    |   Wednesday, 14 Oct 2009 08:45 AM

It’s obvious that the U.S. economy has been ailing for quite some time and money has been running away from it at a stiff pace to most places outside of the United States such as the euro, but in particular the emerging markets.

A strong currency can be good and bad. A rise that is too steep, too fast is hard for a country’s exporters to account for, and so they suffer if the rise is as quick as it has been lately with many of these currencies vs. the buck.

Needless to say, the central banks have not welcomed the steep rise in their currencies. After all, they want a favorable environment for their corporations to be able to function, and what they have right now is a serious challenge.

Just in the past week or two there have been several central banks that have either voiced concern over the steep rise in their currencies or they’ve gone so far as to intervene by selling their own currency and buying up dollars at the same time.

As I’m writing this, Brazil just stated that they may tap their sovereign fund to buy dollars in order to stem the rise of their currency.

Then, last week, South Korea’s central bank stated that it was undesirable for the won to move in one direction, which is upward. South Korea wants its currency to chill out for a while and take a breather from its rise.

State Street, a financial services provider, said that the South Korean won would have been rising faster had its central bank not been supporting the dollar. That’s code for the central bank selling the won and buying up dollars.

Then there’s Indonesia’s central bank. It intervened in its currency, the rupiah, on Oct. 8 to stem the sharp rise of its currency against the dollar. Additionally, the central bank commented that the rise in the rupiah was too fast. So the central bank bought about $50 million that day as it sold their rupiah at the same time.

Then lastly, European Central Bank President Jean-Claude Trichet kept interest rates unchanged at that central bank’s meeting. However, while the currency world was listening to Trichet’s speech, he took the time to note how strongly he believed in a strong dollar and how good it was for the world at the moment.

Translation: I need a weaker euro right now to help our economy out. That’s what Trichet really wanted to say, but he had to talk in central banker code, as usual.

So right now, we are seeing steep rises in many foreign currencies as the greenback continues its fall. However, it’s good to realize that all of these central banks don’t welcome the rise and that they are resisting it sometimes to the point of intervention.

Therefore, be cautious as these trends progress because there could come a time when these central banks do even more to reverse the uptrends in their currencies or at least hinder their rise.

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SeanHyman
It’s obvious that the U.S. economy has been ailing for quite some time and money has been running away from it at a stiff pace to most places outside of the United States such as the euro, but in particular the emerging markets.A strong currency can be good and bad. A rise...
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2009-45-14
Wednesday, 14 Oct 2009 08:45 AM
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