Inquiring minds want to know: Will all the moving parts in the Federal Reserve’s Open Market Committee press release of August 12 net out as good or bad for the dollar?
The answer is important to more than just currency traders: the dollar is likely to be the major driver for stock prices in the rest of August.
Just as it has been for the past few days.
On the one hand, the Fed said the economy is stabilizing. The financial markets always hear that as “The economy is recovering” so that’s a plus for the dollar.
On the other hand, the Fed said the economy was still weak enough so that it didn’t see a need to raise rates for a long, long time. The market heard that as, Not until 2010 at the earliest. Lower yields aren’t good for a Treasury that has billions upon billions of bonds to sell to pay for the federal deficit. This is a minus for the dollar.
And on the third hand,the Fed announced that it would end its program to buy Treasury bonds in the open market in October, just one month later than originally scheduled. That will hurt bond prices and send yields up a bit, but on balance this is a plus for the dollar. Wall Street and overseas investors are very, very nervous about how and when the Fed will start exiting the market and shrinking its balance sheet.
When the Fed instituted this buying program in March, the dollar fell. It’s likely to rally on news that the Fed is getting back to normal policy parameters and ending all that fancy-shmancy quantative easing stuff no one really feels very comfortable with.
If you can find a clear trend in this, you’re a better market reader than I am. (Or at least a more imaginative one.) I think what the Fed has done has ushered in at least a short period of dollar rallies followed by dollar corrections followed by dollar rallies as investors recalibrate their understanding of risk among currencies.
I’d expect that stocks will respond to this slopping around with their own version of an indecisive August.
fed
I think they want to show stability to keep the somewhat positive buzz going and will do so until the end of the year not to spook Holiday season. meanwhile foreclosures up, after the holidays should be ugly with store closures/more malls hurting, etc. this is mildly inflationary as evidenced by gold oil sugar etc reaction today.
and bad for dollar creating the next bubble with all this debt/printing. same old same old bubble fec
alok, you can look on this something for everyone confusion as an effort by the Fed to save it’s credibility (what’s left of it) when it finally decides what to do. The last thing the Fed needs–because global confidence in U.S. monetary and fiscal policy is tenuous at best–is to take a decisive rhetorical position now and then have to reverse course when the facts on the ground change. Which of course they will.
BenWobbles, I’ve got a happy scenario. The dollar would get stronger if domestic politics in some country (or countries) that counts get really nasty and everybody flees to the safe haven of the U.S. dollar (future inflation, depreciation, and deficits aside). Like that one?
Jim,
Is there a realistic scenario (besides deflation) that the dollar won’t weaken significantly in the next 2 to 4 years? With all of the new money being printed, it seems inevitable.
Could not have summed it better but as written by me earlier thats exactly what FED wants , confusion as at present its perfectly happy with what markets are doing to public confidence and sentiment without effecting rates and USD but it cannot last for long , USD will rally sooner or latter and rates will go up not by FED but by bond traders and stocks will drift for some time till this theme has played out also stocks need time to rest as they ran so hard for almost 6 months now
At the end of it either real economy will start doing visibly well so stocks can rally on fundamental basis otherwise we crack more …
Thats the best I can do with all this confusion around ….