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Carney: QE’s stealth effect is a weaker currency

Bank of Canada Governor Mark Carney said central banks have been less than forthcoming in admitting that one of the primary aims of quantitative easing is to weaken their foreign-exchange rates, remarks that will fuel a tense debate over the effect the Federal Reserve's policies have had in stoking the currency war.

"The unspoken issue with quantitative easing writ large is the exchange rate channel," Mr. Carney said Wednesday evening in New York at a conference organized by the Economist magazine.

"The one area where central banks maybe haven't been quite as up front is (that) the fact is that when you quantitative ease, the portfolio-balance effect, which is the main transmission mechanism, operates through the exchange-rate channel, just as it does when you lower interest rates," Mr. Carney continued. "That is part of the stimulus you get."

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With its benchmark interest rate near zero, the Fed has created dollars to buy financial assets worth about $2-trillion (U.S.) to keep downward pressure on borrowing costs. That policy also has contributed to a weaker dollar, which has been a boon for U.S. exporters -- and an irritant for some U.S. trading partners, such as Brazil and South Korea, that have had to cope with rising currencies.

But Mr. Carney's objective was not to criticize quantitative easing. He said Fed chairman Ben Bernanke "has delivered" and the heavy criticism he has received "appears unwarranted." Mr. Carney said the Fed's two asset purchase programs -- commonly referred to as quantitative easing, or QE -- have been a "net positive for Canada," even though the loonie surged above parity with the U.S. dollar.

Rather, Mr. Carney was trying to make a finer point. He suggested that much of the rancor over QE could have been avoided if central bankers were clearer in their communication of policy.

"The issue goes back to a calm understanding of why an institution is doing it, what the end objective is," he said. A good place to begin would be avoiding describing QE as business as usual, Mr. Carney said. QE should be clearly defined as an exceptional policy that will be deployed only when absolutely necessary. "It's important to be up front," he said.

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