The U.S. dollar plunges due to quantitative easing

| 18 March 2009 14:45

The U.S. dollar is getting hammered today. It is now trading near 1.34 to the euro, 1.42 to Sterling, 96 to the Yen and 1.14 to the Swiss franc. These are huge hockey stick style moves from 1.30 to the euro, 1.39 to the pound, 98 to the yen and 1.18 to the Swiss franc just this morning. The dollar is getting killed here.

benchmark-rates-2009-03-18

What gives? Well, basically, the market has lost confidence in the dollar. Brown Brothers Harriman thinks its quantitative easing at fault (hat tip Marc).

The FOMC took major steps on the quantitative easing path and this sent the dollar sharply lower. The Fed will buy $750 bln more of MBS and $100 bln of GSE debt, but the big surprise is that it will buy $300 bln of long term Treasuries. The economic assessment is little changed as was the inflation asessment. The real take away is the actions the Fed is taking and is much more aggressive than observers, including ourselves expected. The US dollar has been crushed, even the emerging market currencies hhave rallied. The key consideration might be that quantititative ease is currency negative–as it was for sterling, yen and Swiss franc. However, an alternative explanation is that with today’s move the Fed has finally gotten ahead of the curve and this will boost confidence of a recovery later this year.

US bonds have rallied strongly. In answer to the ubiquitous question of who is going to buy the flood of Treasuries that are being brought to the market, the Fed says they will. The 10-year note yield has fallen more than 35 bp and the 30 year yield has dropped 30 bp. The stock market has rallied strongly. The magnitude of the move likely means positive follow through tomorrow in Asia and Europe.

avatar About Edward Harrison

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages, a skill he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.

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