The Federal Reserve's monetary policy statement was as dovish as it could possibly get. But then, surely it was acting in accordance with its mandate.
The Committee explained that, "without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions." They outlined their new bond purchase program, pledged to do more if the labor market doesn't improve and emphasized that a highly accommodative monetary policy stance would be appropriate "for a considerable time" after the economic recovery strengthens.
What the central bank is trying to tell us is that even if the recovery gains momentum, they won't be hurrying to unwind the stimulus until they are certain that the recovery is here to stay.
As has been the case with QE1 and QE2 the Fed has swung into action in a massive way.
The open-ended nature of QE3 came as a major surprise for the market and even before the news was properly digested; it was assumed that QE3 is bad for the dollar.
While currency traders may be confused, the rally in equities and the drop in bond yields confirm that investors are pleased that Bernanke was able to shrug off politics and rev up the printing presses.
At the end of the day, this will be bearish for the dollar when viewed in isolation.
However (there is always a however!) this has been a monumental week for the markets yet we have seen the dollar fall by less than 1% since the package of measures was announced.
We have to remember that the U.S. is not alone in having problems with its economy and currency markets trade on relative value of one currency to another.
Japan, U.K. and, of course, Europe are all battling to regain traction in their economies and it is only history that will show how well Bernanke, Geither, Noda, Cameron, Osborne, Merkel, Dragi etc. have done in first containing, then growing out of the global economic slowdown. It should be noted that Japans’ Finance Minister killed himself a few days ago although the economic situation in Japan does not appear to have been the reason.
Japan has a track record of intervening in currency markets to weaken the Yen when its strength threatens Japanese exports. They seemed to be coming to terms with its currency trading at much higher levels. Indeed 80 had become the new 100. Now we see the dollar as unable to sustain a rally above 80 and Japan will not want to see a gradual rise in the value of the Yen so intervention is clearly on the cards.
Japan is not Switzerland however and the markets will gladly take on Japan if they intervene alone. It is unlikely in the extreme that the Federal Reserve or the ECB will join in concerted intervention so with a lack of policy options to weaken the currency, Japan will continue to suffer.
The U.K. is, to a certain extent, becoming sidelined globally as its influence wanes. Being apart from the EU allows it to make its own policy mistakes although given where Europe is headed that is maybe no bad thing.
Enough has been written about the woes of the EU and it is sure there will be more strong headwinds in the coming weeks/months.
The major currencies will continue to move according to that days or weeks news but this week was extremely significant in that not only were events Euro positive, they were also dollar negative.
There have only been two QE’s to compare to so it is very difficult to use them statistically to say what will happen to currencies following the third but the only certainty is that there will be volatility