07.06.201910:45 Forex Analysis & Reviews: Fed can push the dollar down by reducing the interest rate

This week, the US Democratic Senator from Massachusetts Elizabeth Warren proposed to the Fed more active management of the value of the dollar to support exports and domestic production. US President Donald Trump would certainly approve such steps.

However, there are two problems associated with this. First, it is a policy that involves currency manipulation and is not endorsed by the United States for allegedly being pursued by other countries. Second, and more importantly, the Federal Reserve is tasked with controlling inflation, not the value of the national currency. It is obvious that with its main instrument – the interest rate – the regulator will at best be able to achieve only one of these goals.

It is assumed that if the Fed reduces the interest rate this year, as many investors expect, it will push the dollar down, which will help to stimulate the country's economy, making exports more competitive and imports more expensive. However, for the Central Bank, the rationale for reducing the rate has nothing to do with the USD rate. Most likely, an assessment of whether the rate cut makes sense will require the fed to answer the question of whether it will be possible to stimulate production and employment in the country without the risk of inflation.

Judging by the latest statements of senior representatives of the Fed, the regulator is not yet ready to reduce the interest rate, but the escalation of trade tensions in the world pushes it in this direction.

Recall, the last time the Fed decided to reduce the rate more than 10 years ago – in December 2008.

A regular meeting of the American Central Bank will be held on June 19, at which it will have to carefully build communication, dealing with the aggressive position of the market on where the interest rate will go next.