Crescenzi: CPI Buoys Dollar
Tony Crescenzi
05/15/08 - 03:14 PM EDT
Tony Crescenzi discusses the CPI data and its effect on the dollar in this post from earlier today on RealMoney
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The welcome results of yesterday's release of the consumer price index could help underpin the dollar's recent stability for the obvious reason that tame inflation will prevent an erosion of the dollar's purchasing power, which of course would appeal to foreign investors. The dollar has been trending higher since it bottomed on March 18, as gauged by the
Federal Reserve's trade-weighted dollar index, which has increased 2.4% since then.
A key factor in the recovery has been the easing of conditions in the credit markets as well as the Federal Reserve's apparent desire to stop cutting interest rates. Indications that the U.S. gross domestic product will be revised to a gain of about 1% or so from the advance estimate of 0.6% are also providing a boost.
The April 11 communique issued by the G-7, which essentially called for a stronger dollar, has been another important factor helping the dollar. The G-7 would be smart to consider a strong intervention effort geared at pushing speculators toward their pain threshold and thus putting more balance in the foreign exchange markets (by keeping speculators honest and reducing one-way betting). The world would benefit from such an effort given the impact that the falling dollar has had on commodity prices.
