Tags: Rickards | Fed | dollar | weak

James Rickards: Fed Policies Will Weaken Dollar Further

Wednesday, 21 Nov 2012 10:05 AM

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The Federal Reserve's ultra-loose monetary policies designed to kick-start the economy may not have weakened the dollar too much, but stay tuned, as the greenback is poised to erode, said James Rickards, a partner at JAC Capital Advisors.

The Fed is buying $40 billion in mortgage-backed securities held by banks every month until the economy and labor market improve, a monetary policy tool known as quantitative easing (QE).

The announcement marks the third time the Fed under Chairman Ben Bernanke has rolled out QE measures to jolt the economy since the 2008 financial crisis, with the first round seeing the Fed snap up $1.7 trillion in mortgage securities and the second round seeing the Fed buy $600 billion in Treasury securities held by banks.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

QE aims to stimulate the economy by injecting the financial system full of liquidity via asset purchases that push down interest rates to encourage investing and job demand.

Side effects include a weaker dollar, rising stock and commodities prices and fears inflation rates will soar once the economy gains steam.

The dollar, however, hasn't weakened as much as many had thought, mainly due to safe-haven demand from investors seeking to cut exposure to Europe.

The dollar's liquidity makes it an attractive place to camp out amid times of uncertainty despite its poor returns, and expect dollar demand to continue if tensions in the Middle East escalate.

But investors need to remember that the Fed has made clear it will continue pumping liquidity into the economy until it sees marked improvement in the labor market.

"The Fed wants a cheaper dollar, but that doesn't mean they're going to get it" right away, Rickards told Yahoo.

"If they don't get it, they'll have to try harder."

The dollar index, which tracks the performance of the U.S. currency versus a basket of six other major currencies, is up 3.3 percent over a year, and inflation rates remain largely in line with expectations.

That could change if trading partners decide to strengthen their currencies or if U.S. consumers grow wary of inflation.

"Instead of nice smooth path from 2 percent to 3 percent, [inflation] could gap to 6 percent in a matter of months," Rickards said.

Bernanke, however, said recently that inflation remains under control.

"Because ongoing slack in labor and product markets should continue to restrain wage and price increases, and with the public's inflation expectations continuing to be well-anchored, inflation over the next few years is likely to remain close to or a little below the [Federal Open Market] Committee's objective," Bernanke said in a speech at the New York Economic Club.

While inflation rates have bumped up in the past due to high oil prices pushing up fuel and transportations costs, overall, prices have remained stable.

"Since the recovery began about three years ago, consumer price inflation, as measured by the personal consumption expenditures price index, has averaged almost exactly 2 percent, which is the FOMC's longer-run objective for inflation," Bernanke said.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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