The Motley Fool

Quick Thought Of The Week: Manipulation

So, the White House has reckoned that China and the European Union are currency manipulators. It only goes to show just how badly informed the White House is with the workings of central banks.

Show me a central bank that doesn’t “influence” its currency, and I’ll show you a central bank that isn’t doing its job properly.

A central bank is there to keep inflation in check and to maintain economic stability…

…. It can do so in all sorts of ways. It can adjust various interest rates at its disposal. It can print money. It can withdraw money. It can intervene in the market by buying or selling foreign currencies.

That is all part and parcel of the things that central banks do.

Switzerland, for example, introduced negative interest rate during the 2008 financial crisis to deter investors from piling into the franc. Japan still has negative interest rates.

China has cut its banks’ Reserve Requirement Ratio to release more money into its economy at a time when growth is slowing and confidence is low. Singapore uses its currency to control inflation.

But right now, the greenback is in demand. Investors want to hold it because its interest rates are more attractive than other developed economies. So why wouldn’t they want to hoard dollars?

America’s interest rate is a full 2% points higher than in the eurozone. It is 2.1% more than in Japan’s. It is 1.25% higher than in the UK. And it is a quarter point higher than in Singapore.

What’s more, US interest rates are likely to rise further.

That’s because the American economy is growing. Inflation is rising. Consumers are spending strongly. Company profits are expanding, and unemployment is low. So, the US Federal Reserve is set to raise interest at least a couple of times more this year.

Amusingly, the White House said it would like more support from the Fed by keeping interest rates low. In other words, it wants the Fed to manipulate interest rates to make the dollar less attractive.

Oh dear! You just can’t make this stuff up.

A version of this article first appeared in Stock Advisor Singapore and Stock Advisor Gold.

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