I am taking a different approach to following the currency markets with an emphasis on how well the Executive (Government) is managing the currency.
Article 1, Section 8 of the US Constitution states that Congress has the legislative power to coin money and regulate the value of money. Congress has delegated this power to the United States Treasury and the Board of Governors of the Federal Reserve System.
The Treasury regulates the value of money when it sells debt, thus impacting interest rates, in addition to intervening in the currency markets when appropriate to stabilize the value of the dollar.
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The Board of Governors regulates the value of money through monetary policy. Specifically, the Fed influences the overnight interbank rate, the rate at which member banks lend their excess reserves to one another. The Fed does this by setting a discount window rate, the rate at which it provides member banks with guaranteed loans, and the interest on reserve balances, the rate the Fed pays member banks for keeping more cash in their vaults instead of lending money to the public.
Through monetary policy, the Federal Reserve controls the money supply, which influences the interest rates at which the public can borrow money.
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With all the talk of de-dollarization, where nations reduce their holdings of US dollars and replace them with other currencies, I think it’s time to take a closer look at how well the US is managing demand for its currency. If demand for the dollar falls, this may signal a drop in demand for US securities, labor, property, and other assets.
July 3, 2023
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