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November 25, 2005
Mirror, Mirror, On The Wall, Who's The Most Hawkish Central Bank Of All?
I guess the answer, for now, is the Federal Reserve. From Reuters:
The dollar edged toward recent 2-year peaks against the yen on Friday and rose versus the euro on the U.S. interest rate advantage over Japan and the euro zone.
The U.S. Federal Reserve's campaign of credit tightening, with expectations for further increases, has helped drive the dollar up more than 15 percent against the euro and yen this year.
On first review, that story may seem a bit puzzling light of this news, from the Financial Times:
Japan’s core consumer prices stopped falling in October, raising expectations that the world’s second-biggest economy may be on the verge of hauling itself from more than seven years of damaging deflation.
But the plot thickens:
Instead of celebrating, politicians lined up to remind the Bank of Japan that it was too early to declare deflation dead or to ditch its super-loose monetary policy.
Heizo Takenaka, the powerful internal affairs minister, told the central bank it should set monetary policy in conjunction with the government. In a repeat of stern remarks made by another senior politician this month, he warned the BoJ that its independence could be stripped away if it tightened policy prematurely.
As we have been discussing here at macroblog, that sort of "advice" certainly seems to be all the rage these days. This report from the Wall Street Journal (page A9 in the print edition)...
Corporate confidence faltered in key areas of Europe this month, underscoring the fragility of economic conditions across the region.
A drop in Germany's bellwether index reflected a darkening view of current business conditions and the outlook for the coming year. On Thursday, the Ifo institute said its business-sentiment index for November fell to 97.8 from 98.8 in October. Last month, a dramatic improvement in the survey data had been hailed as a harbinger of better things in store for euro-zone companies.
In Belgium, the central bank reported a sudden downturn in business confidence to -4.3 in November, after a gradual improvement over the previous three months. The survey is another litmus test of business confidence across the 12-nation euro zone owing to Belgium's heavy dependence on exports.
Both declines reflected a marked deterioration in the retail sector.
... certainly illuminates this, from Bloomberg:
ECB President Jean-Claude Trichet told newspapers in Italy, Germany and France in an interview published yesterday that he doesn't see the need for "repeated'' increases. That follows his comments Nov. 18 when he said the Frankfurt-based central bank is ready to "moderately augment'' its benchmark rate from a six- decade low of 2 percent.
"Trichet has emphasized that we're not going to get a series and we may just get a one-off,'' said Wilkes. "The Fed will continue to raise next year.''
This is the point where I remind you that exchange rates are pretty complicated animals. While it is certainly true that short-term interest rates have their impact, they are wrapped up into a bundle with confidence about future inflation rates, beliefs about the pace of economic growth, expectations about the changes required to bring about balance in a country's international trade position over time, and myriad other elements that are hard to disentangle.
What seems to me to be the most obvious feature of the global economic environment for now is the pretty remarkable resilience of the US economy. That may help explain why the Federal Reserve appears to be the only central bank among the big three that isn't receiving lots of input from the rest of the government on how monetary policy ought to be run. And that may help explain why the dollar is appreciating , despite lots of reasons to believe that it should be moving in the opposite direction.
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