The newest announcement created by the US Fed and the influence of this on the worth of the US dollar appears to recommend that the state of the economy is certainly affecting the worth of the dollar. The newest Fed statement that it is ready to offer additional stimulus to the US economy is indicative of two points. 1st that the Fed is acknowledging that the US economy is nevertheless weak, and second that the Fed might undertake quantitative easing to address the scenario of a weak economy.
The poor functionality on the customer spending, employment front, reduce housing wealth and soft rates, appear to have urged the Fed to make such a statement. General, the US economy grew 1.six% in the second quarter as compared to three.7% in the earlier quarter reflecting the slowing pace of financial recovery. Quantitative easing will imply that the Fed is open to getting much more assets and flooding the economy with much more liquidity. This properly implies that the provide of dollars in the economy will go up and the markets really feel that the worth of the dollar really should fall in line with such an eventuality.
The quick influence of the Fed statement was a loss in the worth of the dollar versus main trading currencies like the Yen, the Euro and the Canadian dollar. Analysts have interpreted the US Fed statement to recommend that though the possibilities of a double dip recession have dipped, the danger of deflation is higher. The Fed has indicated that it is uncomfortable with the present levels of inflation and might indulge in acquire of bonds.
Quantitative easing or an improve in funds provide could assistance counter deflation as there will be much more funds chasing the very same goods and solutions in the economy, which could place an upward stress on rates and ward off deflation.
Fairly clearly, the slowdown in the US economy and the measures that the Fed could take to counter the slowdown are top to loss in the worth for the US dollar. When, the markets might have reacted sharply to the Fed announcement, the US dollar continues to be the main danger aversion currency and could rise in case of the announcement of any untoward financial improvement. Such a improvement could force investors to turn to the security of the US dollar and make it go up. The US Fed’s announcement that it could take actions to stimulate the economy additional led Asian stocks to recede, indicating some sellout. The funds from such sales could move back to US treasuries and enhance the dollar, which would indicate the danger aversion sentiment. When, the Yen also acts as a danger aversion currency, any actual substitute to the US dollar for the objective is but to be established.
Even so, the act of printing much more funds to induce inflation and to stimulate the economy could have an overbearing influence on the lengthy term worth of the US dollar. In the previous, such acts have led to currencies plunging, even though the US is probably to be cautious in its quantitative easing such that no drastic fall requires spot in the worth of the dollar.