Deflation of the US Dollar?

Federal Components

Inflation is often an indicator of deflating prices and an uncertain financial future. The US Federal Reserve
appears more concerned with total economic growth than assisting the floundering Wall St. stock market. The Feds seem to dismiss the inflationary process. A recent statement from the Federal Reserve stated that the Federal Funds rate is down 2,5% and the discount rate is down 2.25%, minimizing the pressure of inflation. Federal chairman Fisher from Dalles and Chairman Plosser from Philadelphia both contributed to the Federal Reserve Statement. Federal Chairman Ben Berante will address the issue on April 2nd when he addresses the economic community.

It is a time of ambiguity surrounding the real value of the US dollar. The falling dollar amount is in part due to US policy that helps increase inflation and decrease spending. From January to February, the core producer inflation (CPI) stayed equal. This month the CPI increased by 0.5%. This is the fasted in 17 months for a 2.5% year increase. Official support for the US dollar has also been falling hard on the world foreign market exchange. The US Treasury bond yields also lose value as the dollar falls. On March 17, the 10-year yield of the US Treasury fell to 3.3%, below the 0.75% decrease in January. The yield is at the same level seen in June 2003, which also similarly occurred before a Federal rate-cutting meeting. This led the Federal Reserve to claim the monetary problem was over, which in turn caused a high rise in yields. Federal marketers are still not comfortable, avoiding risks in the financial markets.

Global Context

The US policy attempts to manage the recent dollar’s decrease, benefit’s the country’s exporters. The US trade has been decreasing over the past 6 months. The trade is stretched (at c4.9%) as it has been historically. All this means is the US has to allure financial input from overseas to prevent a crisis of balance payments. For years, the rest of he world has been pleased to put its funds in the US Treasury Bond market. Global investors however, are now realizing the devalue of the US dollar. Ideally, global investors would invest in US markets, but because of creeping inflation and the decreeing value of the dollar, it just is not happening.

Attaining Global assets is crucial. Expert Charles Stanley, believes that the Q2 risk investors will return. This could turn the devaluing dollar around and result in a better H2 in 2008 than an H1, (particularly with sterling). US equities are expected to disproportionally perform over global equities. This would result in building US weightings on a gradual basis.