No End To Fed QE ? US Dollar Gains, AUD & NZD Lose Ground

Published: Thursday, 20 June 2013 09:00 BST - Written by David Woodsmith

STORY LINK No End To Fed QE ? US Dollar Gains, AUD & NZD Lose Ground

The latter part of yesterday’s North American session did not bring the announcement of a cutting back in QE by the Federal Reserve which many analysts had been anticipating. However, Fed Chairman Ben Bernanke’s press conference which followed the FOMC’s latest policy statement triggered pronounced lurches in the value of several of the sixteen most-actively-traded global currencies.

The FOMC’s decision to maintain its current monetary policy stance would, on its own, have caused a weakening of the US Dollar, however Fed Chairman Bernanke’s pre-announcement of a winding down of QE3 in his press conference which followed caused a strong rally for the Buck. The revelation sent the Pound to US Dollar exchange rate (currency : GBP USD) almost immediately down into the 1.5400s, while the Australian Dollar to US Dollar exchange rate (currency : AUD USD) lost a hefty 200 pips in the aftermath of the comments. Losses for AUD USD were accentuated by the negative effect which an end to the Fed’s ‘easy money’ policy will have on the high-yielding Aussie.

A knee-jerk reaction following Bernanke’s statement was always to be expected, however on closer inspection the time scale for change which the Fed Chairman laid out last night may cause last night’s gains for the Greenback and losses for the high-yielders to be erased in the short-to-medium term. First things first – Bernanke’s suggestion that QE might be wound down was conditional on the Fed’s forecasts for the US economy coming true. This is some condition, given that central bank forecasts are infamous for more often than not going awry. Even if the Fed’s predictions do come to pass, Bernanke stated that the Fed would not completely withdraw its extraordinary policy stimulus until the end of 2014. They say that a week is a long time in politics. If that’s true then a year and a half is an eternity in the fast-moving $4 trillion a day global foreign currency markets.

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