• 3 hours Mining Boom Sparks Deforestation Concerns
  • 21 hours The Cannabis Culling Has Wall Street Disappointed
  • 1 day Vigilante Offers $100,000 Bounty To Hack Banks
  • 2 days The Dairy Industry Is Dying
  • 2 days The Most Impressive Electric Vehicle Of The Year
  • 3 days Gold Miners Are Having A Stellar Second Half
  • 4 days How 3D Printing Is Turning Each And Every Industry On Its Head
  • 4 days Is The $3.5 Trillion Healthcare Industry About To Get Much More Transparent?
  • 5 days Gamblers Are Betting Big On Trump’s Impeachment
  • 5 days Even Banks Can't Answer Aramco's Trillion Dollar Question
  • 6 days Will Bezos Buy The Seattle Seahawks?
  • 6 days 6 Tech Trends Transforming The Travel Industry
  • 7 days Ousted Uber CEO Cashes Out $500 Million In Stock
  • 7 days Trump Prepares For Another Key Tariff Decision
  • 7 days The Free Money Bubble Is About To Burst
  • 8 days The Crushing Reality Of Poverty In America
  • 8 days Should You Buy Into The World’s Largest IPO?
  • 8 days The Infinite Possibilities Of Cosmic Energy
  • 9 days Analysts Link Walking To Economic Growth
  • 10 days Will Japan Turn Its Back On The Aramco IPO?
Another Retail Giant Bites The Dust

Another Retail Giant Bites The Dust

Forever 21 filed for Chapter…

Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

Andrew Smithers

Andrew Smithers

Andrew Smithers, founder of Smithers & Co., is also columnist for London's Evening Standard and the Tokyo Nikkei Kinnyu Shimbon's Market Eye, and is regularly…

Contact Author

  1. Home
  2. Markets
  3. Other

U S Fiscal Policy May Lower The Dollar

Last week I wrote about the dubious argument that the dollar needs to be weak because it is fundamentally over-valued. This does not of course mean that the dollar won't be weak. In fact the proposed US tax changes just announced make this more likely.

These proposals look like a damp squib. Estimates for the effective stimulus given to the US economy vary from around 0.2% to 0.6% of GPD. This is a nugatory change, given the potential for a much larger equivalent rise in the household savings rate.

The proposed tax changes make a weak dollar more likely not because the US Administration is being reckless with its budget policy, but because it is not planning to increase the deficit by enough to stimulate the economy.

The consensus estimate for US GDP this year is for growth of around 2.5%. This may prove wrong, but it is just as likely to prove too optimistic as too pessimistic. For a central estimate it is dangerously low.

Profits rise and fall relative to GDP, depending on whether growth is above or below trend. The consensus forecast for 2003 is at least 1% below the consensus estimate for trend growth. It therefore implies that profits will fall. If profits fall, the stock market, which is still over-priced, will probably fall and this will give an added downward push to the economy.

Economic policy therefore needs to be stimulatory. As the amount of fiscal stimulus proposed by the Republicans is disappointingly weak, the chances have risen that the Fed will have to be truly aggressive.

If US monetary policy is expansionary relative to the ECB's, then the dollar is likely to weaken relative to the Euro. If it does, the initial response will be a change in real terms, but over the longer term it will simply be a nominal fall, reflecting the fact that US inflation is likely to be higher than the Eurozone's.

If both the ECB and the Fed had the same attitude to economic management, then the Euro would be the more likely currency to weaken. Both Europe and the US are threatened with deflation, but the risk is higher in Europe. A balanced approach to monetary policy would therefore involve an easier policy in the Eurozone.

At the moment we have the opposite. Interest rates, both real and nominal, are higher in Europe and the monetary aggregates are growing more slowly. If the attitudes either side of the Atlantic were the same, changes in policy would now call for relative Euro weakness.

The fact that attitudes vary greatly was underlined by the comments from Dr Ben Bernanke, the most recent appointee to the Board of the Federal Reserve. He has remarked that the Fed could ease monetary policy indefinitely and would not be constrained even if short-term interest rates in the US fell to zero. If the economy still needed a boost, the Fed could buy in bonds. The yields on medium terms bonds and then long-term ones could thus be brought down to zero if necessary.

It seems unlikely that the collective mind of the ECB could even think this, let alone say it.

Across the Pacific, however, the chances of policy change are rising. The term of the current Bank of Japan's Governor, Masaru Hayami, ends in March. He has been a fervent opponent of monetary stimulus but his successor might have a completely different philosophy. There is a possibility that Nobuyuki Nakahara might get the job. His views are the diametric opposite of Hayamis' and very similar to those of Dr Bernanke.

If Nakahara, or someone with similar views, is appointed by Prime Minister Koizumi to be the new Governor of the Bank of Japan, then monetary policy could change in Japan even before it changes in America. The Euro could then rise against all other major currencies, doing further damage to the Eurozone's economy.

Back to homepage

Leave a comment

Leave a comment