Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.

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Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.


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FED FIXES AND DOLLAR DEPRECIATION © Leo Haviland September 17, 2012

The broad real trade-weighted United States dollar will depreciate. Over the next several months, its retreat probably will reach July 2011’s record low around 80.6 (for the nearly four decades going back to 1973, monthly averages; March 1973=100) and break beneath it, with around 77.0 a reasonable target. Over the longer term, a descent to around 72.5 to 75.0 would not be surprising.

We know that all else equal, debtors (and borrowers) want as low an interest rate as they can get.

The Fed’s interest rate policy is (and has been for several years) geared toward aiding debtors (borrowers) at the relative expense of creditors (savers). Since debtors deserve special Fed help, surely the unemployed do.

We know that all else equal, debtors in a home currency (imagine the beloved US dollar) tend to enjoy some modest home currency depreciation. This makes their debt obligations less burdensome to pay off. This perspective assumes that these debtors can keep borrowing fairly easily, and at interest rates that not too high (overly punitive).

However, all else equal, foreign creditors are not enamored of such currency degradation. Foreigners hold an enormous amount of US Treasury securities, nearly $5.3 trillion (as of June 2012,

What happened to the US dollar after the Fed’s prior two massive rounds of quantitative easing? The TWD depreciated.

Significantly, the Fed’s determination to keep interest rates pinned to the floor (and thus offering pitiful returns on government debt relative to inflation) for an extended time period, say out to mid-2015, boosts the odds that its QE3 money flood will help to push the dollar down. In addition, recall that he TWD has been in a declining pattern over the past decade (or longer). So has America’s relative international economic and political prominence. Remember that QE3 is occurring alongside substantial US indebtedness (with a potential federal deficit disaster lurking on the horizon), a noteworthy current account deficit, and only modest domestic savings (compare Japan).

The Fed presumably is aware that the TWD declined after the QE1 and QE2 episodes. So apparently the Fed will tolerate dollar weakness to achieve its employment objectives.

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Fed Fixes and Dollar Depreciation (9-17-12)