Tightening Begins Overseas; Here? Not So Much …

Just a couple of weeks ago, I told you what to expect from the U.S. central bank on the interest rate front. Nothing. Absolutely nothing. Not now. And not for a long, long time. The Federal Reserve has made it abundantly clear that the “Free Money” party will keep raging ad infinitum, with all its attendant consequences.

But in a handful of countries overseas, central bankers are actually showing some spine. Unlike the U.S. Fed, they can see that the ocean of cheap, easy liquidity is forming mini-asset bubbles. They realize that the acute phase of the credit crisis is over, making it absolutely unnecessary to maintain “emergency” interest rates. And they’re taking action …

• The Bank of Israel fired the proverbial shot across the market’s bow in August. It raised its base interest rate to 0.75 percent on the 24th of that month from 0.5 percent.

• Indian central bankers have signaled they could soon raise that country’s benchmark reverse repurchase rate from 3.25 percent.

• Speculation is mounting that Bank Indonesia will soon raise its 6.5 percent benchmark rate.

• Ditto for the Bank of Korea and its 2 percent policy rate.

Australia’s central bank raised its key cash rate on Tuesday, indicating that the worst danger for the economy had passed.

And Australia dropped the biggest bomb of all this week …

The Reserve Bank of Australia increased the country’s overnight cash rate by a quarter-point to 3.25 percent, becoming the first “Group of 20″ country to take that step. Private forecasters currently expect the Reserve Bank of Australia to raise rates by a further percentage point in 2010.

Meanwhile, Our Fed Is Singing From
An Entirely Different Hymnal

The message coming out of our officials in this country couldn’t be more different. Here, we’re getting a virtual open-ended promise of government aid and monetary largesse for as far as the eye can see …

• New York Fed President William Dudley just told a Fordham Law School audience that the Fed’s “near-term focus should be to keep significant monetary accommodation in place for an extended period.”

• Boston Fed President Eric Rosengren sang a similar tune a few days earlier. He said, “It’s important that monetary and fiscal policy continue to support the economy until private-sector spending has resumed, and until we are confident that the recovery will continue once the programs that have supported the economy over the past year are removed.”

• And the Federal Open Market Committee’s own statement from its September 23 meeting contained the following, crystal-clear message: “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

The Fed seems determined to let the dollar crash and burn.

The consequences? The U.S. dollar plunged to new cycle lows against the Australian and New Zealand dollars. It got whacked by the Indian rupee, the Singapore dollar, and the Indonesian rupiah. And gold — the ultimate world currency that no central banker can print out of thin air — soared to close at $1,058 yesterday, the highest nominal price level in the history of the world.

The Forecast: More of the Same

From time to time, we’re going to see the dollar bounce. We’re going to see gold sell off. We’re going to hear the occasional throwaway comment from Fed and Treasury officials that they care about the buck.

But we all know the truth. That’s hokum! This is a deliberate campaign to drive down the dollar in order to help reinflate the asset markets. Everyone in Washington knows it. They just won’t talk about it openly!

Here at Money and Markets, though, we don’t mince words. We don’t subscribe to the whole “Fed worship” mentality that seems prevalent on Wall Street. If we see foreign central banks defending and supporting their currencies, while our Fed is doing all it can to throw the dollar under a bus, we’re going to tell you. And we’re going to tell you how to protect yourself. I trust you’d expect nothing less.

Until next time,

Mike

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