From Chinese Press

Rethink on dollar policy needed

(China Daily)
Updated: 2011-05-10 07:54

The Federal Open Market Committee, a part of the Federal Reserve Board (Fed), issued a statement at the end of April saying the benchmark interest rate and the schedule for the purchase of $600 billion worth of Treasury bonds remain unchanged. But even after the end of quantitative easing (QE2), the dollar appears weak, which calls for deeper analysis, says an article in China Securities Journal. Excerpts:

Many experts would say the US dollar has been weakening because the US is printing huge amounts of currency notes. In other words, the dollar would gain strength if the US stops printing more money.

But the weakness of the dollar is related to the potential crisis of US Treasury bonds' credit. The Fed has been printing more notes because of QE2. The result, however, is not only "more money", but also a government guaranty for Treasury bonds.

If the Fed stops buying Treasury bonds, their value would drop and global financial institutions and sovereign funds would sell the bonds they hold. it is this weird cycle that has weakened the dollar.

The weakening dollar has created tremendous pressure on the US government and made Standard & Poor's downgrade its long-term credit outlook on the US from "stable" to "negative".

A currency's trend is not determined by one factor. Under systematic operation, a favorable condition could be turned on its head through systematic gaming. Therefore, we need to rethink every policy related to the dollar.  

(China Daily 05/10/2011 page9)