Dollar is ravaged as Fed goes to zero interest rates

The dollar has been thrown to the wolves by the Federal Reserve’s decision Tuesday to slash its benchmark short-term interest rate to as low as zero.

Do Fed policymakers care about the greenback's fate? For now, they obviously don’t.

The dollar was ravaged in currency trading today, particularly against its major rival, the euro. The European common currency soared to a 12-week high of $1.442, up from $1.398 on Tuesday and $1.271 two weeks ago.

The dollar also plunged to a new 13-year low of 87.24 yen, from 89.35 on Tuesday and 93.30 two weeks ago.

Currency values often are a function of countries’ interest rates, and with the U.S. now at zero on short-term rates, global investors can find better returns on their cash almost anywhere else. That’s a potential drain on the dollar as money shifts elsewhere.

The European Central Bank’s benchmark rate is at 2.5%. Canada's is at 1.5%. Even Japan's, at 0.3%, is higher than the Fed’s target range of zero to 0.25% for its key rate.

"Japan no longer has the lowest-yielding currency in the industrialized world. It’s the U.S.," said Kathy Lien, head of currency research at GFT Forex in New York.

OK. But a currency’s value also is supposed to be a function of a country’s economic outlook. And it isn’t as if the European economy is looking swell for 2009.

Other than U.S. interest rates, "Nothing fundamentally has changed" in the global economy, said Win Thin, senior currency strategist at Brown Bros. Harriman & Co. in New York. "There are bad numbers everywhere."

In fact, some economists believe Europe is at risk of a needlessly ugly recession in part because the European Central Bank has been relatively slow to cut interest rates.

"I think European policy is on the wrong page," Thin said.

But for the moment, the Fed’s move offers traders a great excuse to take profits in the dollar after its sharp rally of the last five months. The euro had plunged as low as $1.24 in mid-November, from nearly $1.60 in July, as global investors rushed into the dollar as a safety play.

Is a debased dollar a bad thing? It threatens higher inflation, eventually, because we have to pay more for foreign goods (and to travel overseas). So it makes us poorer as a nation, to be sure.

And that gives investors more of a reason to distrust paper currencies in general -- which is why gold has surged this week. Near-term gold futures rose $25.80 to $867.50 an ounce today in New York, the highest since early October.

But with the Fed battling severe deflationary head winds as the economy sinks, a weak dollar is the least of its problems for now. If the Treasury were having trouble selling its debt because foreigners were balking at dollar-denominated securities, a falling buck might be an issue. But as everyone knows, Treasury bond yields are at or near generational lows.

What’s more, you won’t be hearing any complaints from U.S. manufacturers about a sliding dollar, because their products are getting cheaper abroad. "A weak dollar will be one of the key factors that will pull the U.S. out of its slump," Lien said. "Any central banker fighting a recession will want a weak currency."

Still, the risk with any currency debasement is that it won't stop just because central bankers have decided that enough is enough.

-- Tom Petruno

Photo credit: Louise Gubb / For The Los Angeles Times

Comments

[Windy]

I love the picture associated with this story.......how fitting, wolves eat their own. lmao

[Andy]

Windy? How fitting, it must blow between your ears. Thats a deer the wolves are eating, not "their own". See the hooves?

[Fed UP]

Higher profit margins for Banks, the crooks. That's all we needed.

Why can't I, the people, get a freaking loan at 0.25% to pay my mortgage?

[Rainy]

Really, Windy? I didn't realize that wolves had hooves.

[Tom Petruno]

For the record, the wolves are eating an antelope.

Tom Petruno

[stephen]

We are the deer. We keep paying over and over .Our dollar deserves to be weak. Our markets are fraud havens. Madoff used to run NASDAQ, that is where he figured out how to do his thing.
The fed is just playing to the notion that deflation is much more of a danger than inflation. I am not sure that short term some deflation would be alright-short term. However, the risk is higher than spiraling inflation. Inflation hurts the poor disportportionately more than does deflation. Deflation is less likely and easier to stop than is inflation. However, should it get out of control the ultimate result is harder too fathom. Hold on it's going to be bumpy.

[mad dog]

This country is being run by airheads. Now that idiot Pelosi wants to tax windfall profits from stocks. If these people keep on, there won't be any investment and we can all go back to the 1860's. At least a good Colt would make you equal to anyone else. The world is going crazy.... Maybe revolution will be the solution. But wait, when the welfare stops, and people can't by food, the riots will start. What will the Feds do then? Start putting people on cattle cars???? It's not going to be fun!!

[Steve]

We need a weak dollar to get THE REST OF THE WORLD to buy U.S. goods, bozos! Maybe that will kickstart the U.S. economy... DON'T WORRY! THE CYCLE WILL TURN IN A LITTLE TIME... don't freak out, everything will eventually be okay... don't let the media totally control what you think... few companies own the information you are fed!

[Alex]

It seems that no one even understands what "the economy" is anymore, never mind the Fed or their stupid interest rates. Why are we on this ship at sea, dependent on the "deflationary headwinds" and, I suppose, inflationary tailwinds, and so on? Why is "the economy" ruining everyone's life, when no one can even explain what it is, or why it matters if a dollar that is not backed by any standard of value loses value? "The economy" is a lie we need to stop believing. Can anyone even imagine what it would be like to have a stable currency? The Fed doesn't stabilize the economy. It causes boom and bust cycles so that its shareholders can profit, and control everyone else. They just move those interest rates, and then buy when the market is low, when no one else can afford to buy, and sell at the peak. We don't need anyone to "hold the rudder" or "steer the ship through troubled waters," because there is no ship, and we aren't at sea. We're here on land, we're poor, and we have a huge parasite called "global finance" in our guts, getting fatter while we starve.

[james]

the pivot point will be reached in 2014, that is 5 more years of slide-down

[John]

The Federal Reserve is deliberately devaluing your dollar.

It's part of the grand plan, one currency under one World Government.

The American people had best DEMAND from their representatives that the UNITED STATES cease all connection/reliance on the FED.

Apparently JFK tried to print a truely American dollar, and they killed him for trying.

Good luck down there.

[David Staken]

Buy Precious metals, and at least stand a chance of capital preservation.
This once mighty country has its best days in the past not the future.

[KAT]

John is right. These greedy bastards are helping themselves to whatever they please. And like useful idiots we rally around them and vote them right into office. All you have to do is get elected and you are set for life.
We are "useful idiots"!!!!