Gitlitz on the Dollar

Economist says the Federal Reserve is what's wrong with the greenback.

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David Gitlitz, the chief economist over at Trend Macrolytics, puts in his two cents about my recent post on whether the White House should rescue the dollar:

A couple points regarding your blog post about the possibility of an "old-fashioned currency intervention." First, such interventions are notoriously and almost invariably futile. That's because they are routinely sterilized by the central banks involved. The Treasury can direct the Fed to buy dollars against foreign exchange but it has no authority to change domestic monetary policy. Thus, unless the Fed elects to change policy simultaneously (which would be extremely unlikely), it will as a matter of course offset the liquidity effect of the currency intervention through open market operations. Thus the net effect on liquidity is zero and beyond some very short-lived speculative churning in the [foreign exchange] markets, the net effect on currency values is also, almost invariably, nil.

That also gets to the real problem facing the dollar which you overlooked—the Fed's policy stance currently is much too easy, resulting in an excess supply of dollars relative to demand. In a floating exchange rate world, currency values are a reflection of the two central banks on either side of the exchange rate. The [European Central Bank] is steady and the Fed is easy and likely to get easier, so the dollar is falling against the euro. In Japan, the [Bank of Japan] is exceptionally easy but confused and nobody can tell what they might do next, so dollar/yen has been bouncing around in a fairly wide range. ... The only reason the dollar looks like it's not sliding so hard against the yen is because it is an extremely weak currency in its own right.