USA to stop the dollar devaluation

The dollar-euro situation will remain the same during the forthcoming months

The Federal Open Market Committee of the US Federal Reserve System decided to raise the federal fund key interest rate by 0.25 interest points – for the fifth time since June of this year, to the level of 2.25 percent, as it was expected before.

The increase of the interest rate has not surprised investors – they were expecting it after the latest raise on November 10th of the current year. Nevertheless, the Federal Reserve System exercised its adherence to gradual increase of the interest rate. Specialists believe that such policy may eventually slow down the dollar growth in a short-term perspective.

The US budget deficit has been growing since 2001. The deficit reached the record of $412.3 billion according to the results of the last financial year. International investors treat every message about a regular increase of the budget deficit quite negatively and lose their confidence in the US dollar. The notorious dual deficit (the deficit of the foreign trade balance and the national budget) is named to be one of the reasons of the dollar decline.

The Bush administration promises to cut the deficit twice during the forthcoming five years owing to the growth of the US economy and the expenditure containment. Experts, however, think that it will not be an easy goal to pursue. Federal Reserve Chairman Alan Greenspan said that increasing rates would be a way to reduce the deficit.

The statement from Federal Open Market Committee says that production was growing gradually despite the previously registered increase of prices on energy carriers. Labor market conditions have been improving as well. Inflation and long-term inflation expectations remain under control. Favorable economic conditions allow the Federal Reserve System leave the mild monetary and crediting policy in the background.

The FRS has reduced interest rates 13 times since January of 2001 down to 0.1 percent – the lowest since 1958. The gradual increase of the interest rate was launched on June 30th. The previous raise was made on November 10th, when the rate made up 2.0 percent.

Specialists are certain that the Federal Reserve System will stick to the gradual increase of the rate in the future too. Analysts of the Region Group believe that a regular session of the Open Market Committee on 2 February 2005 will raise the rate by 0.25 percent again.

FIBO-Group analyst Rushan Zeinutdinov said that the FRS rate exceeded the 2-percent rate of the European Central Bank. International investors may switch their attention to cheaper loans of the European Central Bank, to the detriment of the USA.

However, there is still a big difference between the index of the European and the American economies, to the benefit of the USA. If nothing special happens in the near future, the current status-quo on the market (the dollar-euro situation in particular) will be preserved with minor changes during the upcoming months.

Sergei Malinin

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Author`s name Olga Savka