OIn the public sector, exchange rates are not the objective of monetary policy. This is emphasized again and again by the president of the European Central Bank (ECB) Mario Draghi. And Jerome Powell, head of the US Federal Reserve, made that clear at Wednesday's meeting. But a look at the foreign exchange markets gives a different picture.
Since dollar and euro are now totally in the fire line of the central bankers. This was especially revealed this week. Since the euro was in the valley and mountain trip. First, Draghi ensured that the common currency collided before Powell stopped the decline and returned the buoyancy to the euro. Both central bankers had outdone themselves by announcing new monetary easing measures, ie lower interest rates.
Not a few experts fear a rush of central banks, with corresponding effects on the foreign exchange market. The word about currency war suddenly makes the rounds again. Powell was tough at Wednesday's meeting at first sight. For months, Donald Trump pressed Powell.
Finally, the President of the United States even asked the White House lawyers how he could get rid of Powell. Trump is unhappy that the top guardian of the American currency does not reduce key rates. Despite all the criticism, Powell remained true to his line. He left stable interest rates between 2.25 and 2.5 percent – and made it clear that he would not be blackmailed by Trump.
Asked if he would resign at the president's request, Powell summed up and succinctly said, "I think the law is very clear, my tenure is four years, and I intend to do it completely." Trump For almost a year, the unwritten law, according to which the government does not interfere in the monetary policy of the central banks, breaks up repeatedly. Barack Obama, Bill Clinton, the two Bushs, all followed this rule. Trump, on the other hand, ignores her.
In late July, however, Powell may have to give up his resistance to Trump's delight. The Fed has indicated that interest rates may fall again for the first time since 2008. So the central bank wants to prevent a further slowdown in US economic growth. "My colleagues and I have the primary goal of keeping the economy running."
Recently, investments by US companies have declined significantly, Powell said. The uncertainty increased. This was a far more pessimistic judgment than at the last meeting. By May, the Fed had spoken of "solid" growth.
Financial markets responded promptly. They are now pricing a rate cut for July with a 100% chance and expect two more for this year. The prospect of cheaper money gave Wall Street a fresh boost, which continued on Thursday.
The S & P 500 set a record high. In the bond market, interest rates continued to fall. US government bond yields fell below two percent, the lowest since 2016. The dollar depreciated significantly.
Following Powell's prospects, the euro is recovering
The euro rebounded and cost $ 1.13 on Thursday, more than offsetting the losses caused by Mario Draghi's gloomy interest rate outlook. Draghi had promised more easing of already too expansionary monetary policy in the monetary area. With that, he attracted Trump's ire to himself.
"Mario Draghi has just announced that new stimuli could come, causing the euro to fall immediately against the dollar," Trump wrote on Twitter. This is unfair to the US. Trump fears that a weak currency in Europe will give exporters a competitive edge with the US. "They've been with them for years, along with China and others," he chided.
Asked about Draghi and the ECB, Powell responded immediately: "Central bankers around the world are simply trying to get their work done according to local regulations." Thus, Trump's criticism did not follow, on the contrary. At the same time, Powell did not want to get caught up in the trade war that Trump is fighting against the rest of the world.
For the president of the United States, the dollar is an important weapon in conflict with China, Europe and even with its own neighbors, Canada and Mexico. "We're not trying to move the dollar," Powell said. "Monetary policy is done in the Ministry of Finance." But words are one thing, acts are something else.