Ben Bernanke broke with tradition by voicing support for the US dollar and simultaneously taking a stance against inflation saying “In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets… Dollar weakness over the past year has contributed to the unwelcome rise in import prices and consumer price inflation”.
On hearing his remarks, the financial media and pundits generally took the view that it marked a reversal point for the dollar. They think he would not have said that unless he expected it to be followed by concerted central bank action to support the dollar. In spite of headlines and a fairly widespread consensus about dollar strength, as the chart for the dollar index clearly demonstrates it, has gone nowhere since March.
How strong will the resolve of US monetary policy makers be? They are faced with asset prices falling sharply, their economy slowing and maybe, as it is being rumoured, big trouble at another US bank. We don’t mind if we are laughed at for saying that we think it is laughable to be long term optimistic about the banking sector and the dollar. We believe that the banking sector has a lot more grief to come.
The Gulf States and others whose currencies are pegged or managed relative to the dollar have only one effective escape route from damaging imported inflation which is to allow their currencies to rise against the dollar – sooner or later they will have to do this.
The pound is also destined for a bleak future. The big question is how will it perform against the dollar whose future we think is even bleaker? The five-year chart above shows a clear technical support level for the pound/dollar at $1.90, our view is that the pound will, over time, benefit against the dollar unless that level is materially violated.