The chances of the Federal Reserve intervening in the markets to support the dollar are low in the short-term, although it has now served notice that it will act should another financial crisis send the US currency sliding, believes Maurice Pomery, head of foreign exchange at IDEAGlobal.
He argues that Fed chairman Ben Bernake’s recent comments about the weak dollar have not indicated any great shift in emphasis from growth to inflation, as he stated again that the US economy will struggle until the housing market shows signs of a recovery.
“To get the dollar to rally with any lasting effect the Fed would have to back it up with monetary policy and to think this at present is rather absurd,” he says.
“House prices continue to fall fast and the consumer could enter a phase of essential spending. If the Fed do shift rates too early the effect could be a long sustained deflationary cycle.”
Mr Pomery believes the real worry is that the Fed might know more about the health of the financial sector than it has let on - which is a particular concern as it has already cut interest rates to 2 per cent in an effort to restore calm.
“The Fed are telling us that if another financial shock unravels - and I sincerely think it will - then there is a danger that the dollar could fall fast.
“The Fed has just given us notice that it won’t be a one way bet and they are prepared to take direct action in the dollar’s value.”