By Kurt Brouwer
When times are tough and economic activity is weak, politicians love to blame foreigners for our problems. Today, we find out that the U.S. Senate is attacking China because the Senate wants a weaker dollar versus the Chinese yuan. I’m not kidding. The Senate wants the dollar to fall against the yuan in the vain hope that it will stimulate manufacturing here. Of course, the dollar has been weak for years so that seems unlikely.
Killing the U.S. dollar
Killing the dollar has been federal policy for years. The Federal Reserve has been the main instrument of our weak dollar policy by maintaining low short-term interest rates, which in turn ensure that the dollar remains weak. When the Fed raises short-term interest rates, the dollar strengthens. When the Fed cuts rates, the dollar falls. Unfortunately, now the Fed has cut rates to essentially zero and we are still stuck with a weak economy plus a weak dollar. Let’s take a look at how the dollar has fared against major currencies since 1990. Back then, our interest rate policy and support for the dollar kept it pretty strong. Then, in 2001 that changed as this chart shows:
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