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REPORTERS NOTEBOOK: Dollar's Fate Tied To Fed Policy

   By Bradley Davis 
   Of DOW JONES NEWSWIRES 
 

NEW YORK -(Dow Jones)- Participants at the 6th Annual Forex Forum USA were able to agree Tuesday on one thing: The Federal Reserve's zero-percent rate policy is at the heart of the dollar's weakness.

Beyond that, there was less agreement. Some thought the greenback's swoon was overdone and would come to an end soon on the back of a strong upswing in the economy, which would prompt the Fed to tighten rates sooner than expected.

Others at the forum in New York were less optimistic, arguing that the economy would take a while to heal, leaving the Fed to remain on hold well into next year, while forecasting more dollar weakness.

In the former camp was the keynote speaker, Brian Wesbury, chief economist at First Trust Advisors in Wheaton, Ill. He expects the dollar to find a bottom "in relatively short order" as the Fed will tighten rates in the next six months, rather than in the second half of 2010, which is the consensus.

Contrast that with Maxime Tessier, vice president of currencies at Canadian public asset manager Caisse de depot et placement du Quebec. He is concerned that the economic recovery won't be sustainable, as the Fed's easy money may not make it to the consumer as bank lending remains tight.

"The Fed is probably going to have to sit on its hands for the rest of next year," Tessier said. That'll keep up the pressure on the dollar, which will take a long time to stabilize because there's "so much liquidity to mop up," Tessier said.

In addition, because rates are so low, it'll take a while for rate increases to put a floor under the dollar. Tessier said the key Fed funds rate needs to hit 2% to 3% to stem the dollar's losses against higher-yielding currencies.

The dollar has lost roughly 10% so far this year against the euro, and recently hit a 14-month low just under $1.5100. At midday Tuesday in New York, the euro was at $1.4664.

-By Bradley Davis, Dow Jones Newswires, 212-416-2654, bradley.davis@dowjones.com

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(END) Dow Jones Newswires

November 03, 2009 13:26 ET (18:26 GMT)


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