The US Dollar (USD) Set to Resist QE3 Pressure, Experts Say

on Oct 9, 2012
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Although the previous two rounds of quantitative easing by the US Federal Reserve weakened the US dollar, the new economic stimulus programme might not have the same impact on the greenback. On 8 October 2012, the Financial Times published the analysis of Mansoor Mohi-uddin, managing director of foreign exchange strategy at UBS (NYSE:UBS), who argues that while QE3 may stall the dollar’s long term appreciation, it will not reverse it.

Among the reasons why Mr Mohi-uddin believes that the dollar is unlikely to collapse is the fact that while the US economy has managed to return to modest growth since the 2008-2009 financial crisis, the Eurozone countries are struggling with debt problems and austerity measures, the UK has slipped back into recession whereas Japan continues to stagnate. This in turn is one of the fundamentals set to drive the greenback higher against the other majors.

In addition, the US bond markets have managed to retain their haven status, with investor confidence in US assets remaining intact. The third factor which is likely to prevent the dollar from depreciating is the US energy renaissance and the prospects for reducing the US reliance on foreign energy. Mr Mohi-uddin notes that in this decade the US will be the only major oil-importing region likely to cut its net oil imports as a share of gross domestic product.

!m[The New Quantitative Easing Round Unlikely To Reverse The Greenback‘s Long Term Appreciation Against Backdrop of Global Uncertainty](/uploads/story/546/thumbs/pic1_inline.png)The fourth reason against the greenback’s weakening is the unwillingness of central banks to tolerate strong domestic currencies. The Bank of Japan quickly responded to the Fed’s QE3 with its own stimulus programme to stop the yen from appreciating further, whereas the European Central Bank (ECB) has also announced a plan for practically unlimited bond-buying. The Swiss National Bank has also taken a firm stand against the franc’s appreciation.

And while the Fed’s open-ended plan for purchasing mortgage-backed securities will weigh on the greenback, those favourable fundamentals are likely to mitigate the QE3 impact on the US currency. Mr Mohi-uddin notes that the Fed announcement contributed only to a modest fall in the greenback, from $1.25 to $1.30 against the euro.
It would seem that Mr Mohi-uddin is not the only analyst seeing the dollar as likely to beat the QE3 effect, with Bloomberg reporting on October 9 that other foreign exchange strategists also believe the dollar will strengthen despite the Fed’s monetary easing. Wells Fargo & Co. (NYSE:WFC) and Westpac Banking Corp. (NYSE:WBK), which are among the forecasters with the lowest margins of error in the six quarters ended September 28, expect little damage from the Fed’s efforts to stimulate the economy. Bloomberg quotes Westpac’s senior currency strategist Sean Callow as saying that if the US economy keeps outperforming, QE3 should not cause the greenback much damage, given that most of the US’ trading partners are either growing slowly or contracting.

Although the Dollar index which measures the performance of the greenback against the currencies of six major trading partners dropped by 4.6 percent and 3.9 percent during the first two rounds of quantitative easing, forecasters predict that this time will be different. Bloomberg quotes Mitul Kotecha, head of foreign-exchange strategy at Credit Agricole (EPA:ACA) as pointing out that QE3 does not have “the potency of QE1 and QE2”.
The Copenhagen-based Danske Bank (CPH:DANSKE, PINK:DNSKY) on the other hand sees the dollar picking up from the second quarter of 2013. “The market can no longer underestimate the Fed’s resolve to boost growth,” notes Arne Rasmussen, Danske Bank’s head of currency research, as quoted by Bloomberg. “That will benefit the economy and the dollar.”

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