So the US Federal Reserve is not exempt from the laws of supply and demand. Theory suggests creating more dollars should make each worth less. Sure enough, the Fed’s own measure of the trade-weighted dollar in real terms – the best way to do long-term currency comparisons – is at its lowest since the dollar floated in 1973.
February’s data are due shortly, and should show further deterioration in the inflation and trade-adjusted dollar, hit by the oil price.
Crudely, when oil rises, the dollar falls, and vice versa. Since oil is priced in dollars this is partly just maths but also America’s insatiable appetite for energy. Higher-priced oil means more spent on imports and the currency falls. This is why the dollar is no haven from oil shocks.
The soaring oil price is caused by the Middle East turmoil. But central banks have the power to help – or hinder. Consider Britain and Japan. Since the start of 2008, Brent crude oil is up by a quarter in dollar terms.
The pound has plunged since then: no surprise, since UK interest rates are further below inflation than at any time since the 1970s, and the lowest in real terms in the G7 nations. That is good for UK exporters and terrible for drivers reliant on imported energy. In sterling terms, oil is up by 50 per cent since the start of 2008.
Now look at Japan. It is the only G7 country with interest rates above inflation (deflation, in its case). Manufacturers are screaming about the strength of the currency. But in yen terms the oil price is actually down almost 10 per cent since the start of 2008.
The same goes for food and other internationally-traded commodities. Central banks can be thrown off course, with the euro suffering because of the dire state of its periphery, but the hit from commodity prices broadly correlates with central bank dovishness.
When it comes to moaning motorists or angry exporters, central banks print their money and take their choice.
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