US Dollar Unsurprisingly Weakens after the Fed Announces QE3

By:

on Sep 17, 2012

Listen

US Dollar Unsurprisingly Weakens after the Fed Announces QE3

With the Federal Reserve announcing the much anticipated third round of quantitative easing on 13 September 2012, the US dollar expectedly fell against other major currencies. Bloomberg reports that the greenback weakened to a four-month low versus the euro and to a seven-month low against the yen, as the US central bank confirmed that it was going to purchase more mortgage-backed securities for a potentially unlimited period of time.

According to the Financial Times, the euro hit a session high of $1.3001 following the Fed announcement although the dollar’s losses were limited with traders absorbing the news that purchases to be made by the Fed were limited to a monthly amount of $40 billion. Yet, according to a recent Reuters article, some market players have predicted that the Fed action, combined with the recently announced plan of the European Central Bank (ECB) to lower peripheral Eurozone borrowing costs meant that the euro could potentially extend its gains against the greenback toward $1.35. “It’s a very powerful combination of the Fed coming together with improved sentiment towards the Eurozone”, noted Steven Saywell, head of FX strategy at BNP Paribas (EPA:BNP), as quoted by Reuters.

!m[](/uploads/story/381/thumbs/pic1_inline.png)The UK pound reached $1.6156, maintaining gains made on speculation about Fed action. The Aussie touched a session low of $1.0424, but later climbed to $1.0542, as reported by the FT. According to Bloomberg data, the Dollar index, which measures the greenback versus the currencies of six major trading partners, fell a third day, declining by 0.6 percent to 79.255.

Bloomberg quoted Sebastian Galy, a senior foreign-exchange strategist at Societe Generale (EPA:GLE) who noted that stimulus actions by the Fed and the ECB were “helping the market to move away from two key risks, namely the financing of the US and peripheral risks in Europe”. According to Mr Galy, with those risks disappearing, the market was “rushing again to sell the US dollar and move back into equities and, to a lesser extent, credit.”

As noted in the Reuters article, the fall of the dollar is likely to reduce other countries’ competitiveness, with the risk in question being most visible in the case of Japan, considering that the QE3 announcement pushed the yen to a seven-month high against the dollar. The main Japanese concern is that the Fed announcement is going to lift up the yen to such levels which would threaten Japan’s exports.

Bloomberg reports that speaking to reporters in Tokyo, the Japanese vice Finance Minister Takehiko Nakao called the recent surge in the yen against the dollar “obviously speculative”, adding that Japan could not overlook such moves. This statement will probably add to the speculation about a potential yen-selling intervention, with Reuters reporting that traders in Asia said that the Bank of Japan, which conducts currency intervention for the financial ministry, performed a rate check on 13 September 2012 following the Fed’s decision. Traders regard such rate checks as a sign that Japanese authorities may be moving closer to intervening.