US Dollar Index Gains as Quantitative Easing Expected

Wednesday, 13 October 2010

Since the weekend, there has been a huge amount of rhetoric surrounding the idea that the Fed might look at further quantitative easing measures in the wake of a flailing economy. The US economy is certainly on the downhill road once again - with unemployment continuing to rise (-20,000 jobs in September), and a selection of other economic indicators pointing to worse times ahead.

The Fed is concerned that previous growth outlooks for the USA won't be met in the coming quarters - and as such they are looking to ease more money in to the market.

At the moment, very few inflationary pressures are being experienced as a result of the huge amounts of cash which were poured in to the US economy over the last few years. Many economists were afraid that all of the "cash printing" which was taking place would eventually catch up with the economy and cause price levels to rise throughout.

Therefore - given that this hasn't surfaced, the Fed might have a slightly better mandate for pouring more money in to help the economic recovery.

On Wednesday - the USD/JPY was still trading under the 82.00 level - which is considered mildly dangerous because of the threat of currency intervention by the Japanese Foreign Ministry. It seems however that the Japanese authorities have been completely absent from the market over the last few days, despite the currency pair reaching as far south as 81.20.

Again, the currency pair touched 81.37 yesterday - with many commentators saying that if quantitative easing measures do eventuate, the currency pair could drop as far as 80.00. At that level, the risk of entering the 70's is imminent, however there is no doubt that the Japanese central bank would intervene far before a protrusion in to that area was accepted.