Jaw-Dropping Decline Of The US Dollar: The Fed’s Wish?

High market volatility doesn’t stop just because traders are taking it easy with Christmas holidays lurking around the corner. One of the biggest movements in the financial markets this week has got to be the fast and furious decline of the US dollar in the forex market, which has turned cold from hot, in as fast a speed as for-sale designer wear being snapped up at Saks Fifth Avenue.

The US dollar has fallen more than 1300 pips against the Swiss franc since Monday (and it’s only Thursday!), from a high of 1.1770 to today’s intraday low of 1.0410, which makes it the biggest weekly fall ever!

Against the Euro, the USD has also tumbled more than 1300 pips since the start of the week. The zombie-like ascent of EUR/USD continues today despite the release of the very disappointing German IFO business climate index, which fell to the lowest level in 26 years. As for the US dollar index, it has had its biggest six-day fall ever. The Fed’s cut of the fed funds rate to 0% to 0.25% on Tuesday has made it unappetizing for institutional investors to hold dollars.

Could the Fed be trying to drive the dollar lower to spur inflation? Axel Merk from Merk Fund thinks so. He said that as policy makers don’t want home prices to deteriorate further, an alternative is to inflate the prices of all other goods and services: as a result, the relative prices of homes would be less expensive. And weakening the dollar is an effective policy tool to drive up inflation.

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