Business Insider

Peter Crabb: The Fed should stop fighting currency markets

It’s been said, “You can’t keep a good man down.” These days, the man is the dollar.

Many world leaders are accusing the Federal Reserve of trying to deflate the value of the dollar. U.S. monetary policy is now aimed at increasing inflation, but the value of the dollar has held up well over the past few years.

The Fed announced last week that it considers inflation “somewhat low” and intends to purchase a further $600 billion of longer-term Treasury securities by June 2011. This is about $75 billion in new dollars each month for the next eight months.

Despite plans to supply the market with so many new dollars, the value of our currency is holding up well. For example, the dollar rose strongly in value against the Euro this week. Euro selling pressure developed because investors remain skeptical that Ireland, Portugal, and other European nations can get their government finances in order.

On Monday the yield on 10-year Irish bonds rose to more than 8 percent. The difference in yield, or spread, between the debt and German government bonds (bunds) widened to a record 5.5 percentage points. The financial markets believe Ireland and some other Euro member countries are close to defaulting on their debts.

So what does an Irish problem mean for Idaho?

Like it or not, Idaho businesses, consumers, and investors are all affected by markets around the world. As Thomas Friedman wrote, the world really is flat — especially in the currency markets.

Export sales by Idaho companies totaled more than $3.8 billion during 2009, or more than 7 percent of the state’s GDP. This is down from more than $5 billion, or 10 percent, in 2008 and about the same level we were at in 2006. Nationally, U.S. export prices have actual risen 4 percent since 2007.

The inflationary policies of the Fed have done little to spur export sales. The reason is that many factors outside the U.S. affect the value of the dollar. The Euro lost nearly 1 percent of its value in just one day when Irish bond prices were falling.

A stronger dollar keeps the prices of exports relatively high and the cost of imports relative low. There is currently no inflation pressure from international trade.

The Department of Commerce reported Wednesday that the U.S. International Trade Deficit fell slightly in September. The deficit was lower import because our exports rose. However, the current monthly exports of $153.6 billion are below exports in September 2008.

Despite unprecedented low interest rates and loose U.S. monetary policy for nearly three years now, the dollar buys roughly the same number of Euros, and the same amount of most other currencies. The broad dollar index has the same purchasing power around as when the recession began at the end of 2007.

The value of the dollar is likely to remain high because of issues well beyond the control of U.S. policy makers. They should instead seek better incentives for business investment here.

You can’t keep the good dollar down. The Fed shouldn’t try to fight the currency markets.

Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.