Yesterday, the Federal Reserve announced plans for more quantitative easing. In the tune of $600 billions no less. This means that the US Government will be spending $600 billion for buying back Treasure Bonds. In essence, this is more money being poured into the US economy in an attempt to produce faster growth.
This round of quantitative easing has exceeded market anticipation by at least $100 billion dollars with some of the market’s analysts predicting a much lower bond purchase.
In recent weeks there have been indications that the FED is unhappy with the slow rate of recovery the American economy is displaying so this purchase was, in a sense, predicted. The scale, however, was not.
What does this mean for the value of the US dollar?
It means that it it likely to decrease in value in relation to most other currencies. As with any other market, the more there is of something, the lower its price tends to be. As the FED is printing and pumping more money into the market, it is to be expected that the Dollar will fall. Indeed, it is already weakening today in relation to the Euro which is now trading at $1.423, a rise of 0.64%.
The unease of the market stems from the feeling that we haven’t seen the last of the quantitative measures yet and that more may be coming. It seems that the FED cares little about the value of the USD and is quite happy to drive the currency down further in the hope that this will help revive the US economy.
Will it work?
We will have to wait and see. Expert opinion is divided on this issue so it remains to be seen what will happen. However, one thing is for sure. The Dollar will suffer.
