
How the Federal Reserve’s monetary policy is setting up the US dollar for a fall
- Decision-makers in Washington appear less enthusiastic about having a strong US dollar to encourage consumers to buy goods made overseas
- China may have to get used to the idea of a further rise in the yuan against the US currency, even though it may not welcome the prospect
The Chinese yuan has performed well versus the US dollar in the past 12 months, even as the broader value of the dollar has held up pretty well against major currencies.
In a world where globalisation was perceived by Washington as a net benefit for the US economy, a degree of dollar strength which gets American buyers more bang for their buck when purchasing goods made overseas has a certain appeal.

If nothing else, as recent events in Afghanistan have shown, the US acts in what it perceives to be America’s interest when push comes to shove, regardless of what others might think.
Nixon acted because Washington knew that if international holders of dollars – increasingly unnerved by the cost of US military involvement in Southeast Asia and amid signs of rising US inflation – were to exercise their right to convert dollars to gold at US$35 an ounce under the 1944 Bretton Woods Agreement, the US would not have enough gold to go around.
America’s allies were not happy with Nixon’s decision, but he took the view that devaluing the dollar was the least unpalatable option for the country and for his own re-election prospects in 1972.
How the Fed’s balancing act on tapering risks is pleasing no one
But when sub-target inflation is followed by a period of above-target price rises, adhering to the inflation target concept surely means US benchmark interest rates end up being lower than markets might ordinarily expect as the Fed bides its time before tightening policy.
That could unnerve the currency markets. Oliver Brennan, senior macro strategist at London-based independent research provider TS Lombard, wrote last week that he felt the Fed’s policy stance “is now explicitly [US] dollar-negative”.
The US dollar side of the dollar-yuan equation might currently carry the greater weight, and while China might not need a stronger yuan, the case for US dollar weakness feels increasingly persuasive.
Neal Kimberley is a commentator on macroeconomics and financial markets
