Possible Fed move to cap yield rise could further weaken U.S. dollar

Jun 11, 2020 | Economic Collapse

The U.S. dollar would probably come under further pressure if the Federal Reserve adopts targets for U.S. Treasury yields that would limit their rise and ensure that interest rates remain near zero for some time.

Capping bond yields could diminish the attractiveness of U.S. Treasury debt, as investors look to other alternatives, analysts said. That may exacerbate a downtrend in the U.S. currency that has been partly triggered by a gradual reopening of global economies following shutdowns aimed at curbing the spread of the novel coronavirus.

Since late May, the dollar has fallen about 4.2% against a basket of major currencies.

The Federal Reserve did not announce any measures to cap the rise of bond yields on Wednesday at the end of its two-day meeting. But in a press briefing, Fed Chairman Jerome Powell said the central bank would consider yield curve controls once it gets a better understanding of where the economy is headed.

New York Fed President John Williams and Fed Governor Lael Brainard had raised the idea earlier as a possible complement to other monetary policy actions aimed at keeping rates and borrowing costs ultra-low to spur spending and buoy the economy.

Such a move is seen as a potential policy tool at the central bank’s disposal and could come about later in the year.

Instead of simply setting short-term rates, the Fed could set specific target rates anywhere from bills to notes and bonds.

This has been done in Japan and Australia, and once before in the United States when the Fed and the Treasury agreed to cap borrowing costs to finance spending during World War II.

Analysts said that if the Fed does decide to adopt this policy, it will likely cap Treasury yields out to three or even five years, a move that could undermine the dollar.

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