I think it’s fair to characterize the situation with the Fed’s Quantitative Easing Open Mouth Operations as somewhat out of control. Fears of a disorderly decline in the US dollar are certainly increasing. If anything, the US dollar is oversold right now as Marc Chandler pointed out this morning. Moreover, I think QE is a buy the rumour, sell the news event. The lead in to the actual Nov. 3rd policy decision has been the most successful case of jawboning I have witnessed in a long while. The Fed hasn’t even eased yet.
That said, analysts in a growing list of countries are concerned that this is becoming a problem. Witness comments from Scotia Capital in Canada via the Globe & Mail:
"[Canadian dollar] strength also proves the point that one needn’t have [Bank of Canada] tightening to drive the currency. It’s being driven by U.S. efforts to export its years of profligacy to its trading partners and blame everyone else in a process engineered through debasement of the greenback. That is also sparking flows out of the [U.S. dollar] into commodities that in turn reinforce strength in commodity related [foreign exchange] crosses like [the Canadian dollar] … The U.S. is fooling itself in believing that such efforts may not come back to bite itself via creating instability in foreign markets via feeding abrupt capital flow swings and imbalances ranging from emerging markets through to Canadian housing and household finances."
US policy makers are telling people China is the bad guy and the US is blameless in this currency crisis. But it is clear that pointing the finger at China and saying "That’s the bad guy." is a strategy which is looking ever less credible. It’s not just the Chinese who are saying this. Perhaps, a reversal in the dollar selling or a rumoured US-Sino currency pact would change this. But, from where I sit, this ‘currency war’ needs someone to damp things down instead of people stoking the fire. US Treasury Secretary Geithner is the last person I had expected to take on this role. From all appearances, Tim Geithner does seem to be setting the right tone.