The Fed Chairman, whose Senate confirmation is set for tomorrow, has certainly been using his experience as a student of Great Depression to battle this one. No wonder that with our loose monetary policy the U.S. dollar has been losing value. In the last month, however, sentiment toward the dollar has rising on expectations that sooner or later rates should go up. The market, according to one survey, assigns a better than 50-50 chance that rates will be increased by mid-2010. The Dollar Index, which measures the greenback against six major foreign currencies, has risen more than 3 percent since the beginning of the month. This temporary strength in the greenback has also been hurting gold.

 

Policy makers also reiterated today that keeping interest rates low is contingent on “low rates of resource utilization, subdued inflation trends, and stable inflation expectations.” If inflation, which is lurking right under the surface, becomes more apparent, the Fed’s jobs will be so much harder. Preventing the economies from overheating has always been one of the tasks of the Federal Reserve. Of course, the best case scenario is to raise rates when the economy is actually growing.

 

As we had reported earlier this month, the Reserve Bank of Australia raised its overnight cash rate target to 3.75 percent from the previous 3.5 percent mark. Australia’s GDP growth has accelerated for three consecutive quarters. The country is expected to grow at a greater than 3 percent pace next year. Job hiring levels, business confidence and investment in the country are all running at their highest levels in years, according to recent data. And considering policymakers wouldn’t hike the key lending rate three months in a row if they weren’t confident that Australia’s economy was on rock-solid footing, bullish signals are flashing brightly for the country.

 

Unlike our BRACC recommendations, Russia’s economy remains fragile and the immediate outlook does not look particularly appealing. Russia’s central bank recently announced that they will keep interest rates at their current level, a record low 9 percent, in a so-far unsuccessful attempt to stimulate lending and growth. Russian Prime Minister Vladimir Putin forecasts the economy will shrink by a significant 8.5-8.7 percent in 2009—Russia’s worst-recorded performance.

 

The country’s central bank has cut rates nine times since April. Despite the lower rates, lending remains subdued and many borrowers have not benefited from the cuts, as banks have kept their own lending rates high. Speculators find the ruble attractive relative to other currencies, despite the fall in interest rates, as its interest rates are still significantly higher than those of most other major economies. This has attracted speculative inflows which have driven up the ruble, making exports more expensive and therefore further threatening economic recovery there.