Stronger dollar: Bush bluffing

November 10, 2004 the US Federal Reserve's Committee for Open Market decided to raise the basic rate of the federal funds by 0.25 percent points

This is the fifth within the past five months rate raising: up to 1.5 per cent on August 10, to 1.75 per cent on September 20 and to 2.0 per cent on November 10. Another raising by 0.25 percent points in December is already anticipated on the market.

Rates manipulation is one of the instruments the government employs to influence the national economy. Decline in the Federal Reserve rate results in cheaper credits and weaker dollar, which in its turn stimulates export-oriented industries. However, this factor also increases inflation and budgeted deficit. The measure is traditionally resorted to under crisis conditions to stimulate the US national economy even more. The reduction of the Federal Reserve rate in 1999-2004 may serve an example here. That was done to get over GDP reduction within half a year as a result of slump in the industrial sector, the rise of prices for energy resources, the disappointments over information technologies and the increase in political risks and terrorist threat.

The unprecedented reduction of the rate to 1 per cent within forty years allowed to adapt the US economy to new conditions. This year, the American economy has registered some upsurge. The situation is improving as the Department of Labor reports steady reduction in the American unemployment rate.

The tendency changed within the past six months as the rate went up. That probably happened for two reasons. First, the low cost of money resources made the inflation problem even more acute; that is why America’s financial authority decided to raise the Federal Reserve rate. Second, stabilization of the national currency was part of Bush's pre-election campaign and was proclaimed a priority objective of the Bush administration.

However, experts say the rise in the rates will not be drastic and will not stop the decline in the dollar rate with respect to world currencies. They think the US economy is still weak after the crises of the past years. The market fears the Federal Reserve rate may freeze the way it happened in 2002 when the rate froze on the level of 1.75 per cent. Then, the US Government explained that the economy started reviving. But as it turned out later the rate slid down again together with the US economic indices.

Today world markets are wary of America's economic maneuvers. Analysts say the present-day rise in the rate was taken into account long ago, as it was apparent after facts reported by the Department of Labor. Experts and market makers insist that one factor gives no real picture of the US economy's condition.

The Bush administration will not be oppressive toward exporters who need weaker dollar and cheaper credits. The recent raising of the rate rather means the preservation of the present-day situation has started, experts say. The line of the US Administration has been several times strongly criticized in Europe and Asia that blame America of unfair competition and of an economic war. That is why the slight retention of the dollar devaluation may serve favorable environment for Bush in establishing relations with the European Union.

Economies of other countries will suffer no considerable changes. The European Central Bank rates will not rise, as they are high enough and cause complaints of some EU members. Russia may suffer from probable reduction in foreign investments. When dollar credits get more expensive the Russian stock market will inevitably become less and less attractive.

Sergey Malinin

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Author`s name Olga Savka