We start from the FOMC meeting just ended, where the Fed announced that it has maintained its policy rates unchanged, but this time changing the language. Instead of saying that interest rates will remain exceptionally low probably until mid-2013, now says that these will remain unchanged until 2014, "the Fed now says the fed funds rate is likely to remain exceptionally low through late 2014”.
The '$ USD has started 2012 with a marked downward trend (see chart below)
The '$ USD has started 2012 with a marked downward trend (see chart below)
The market anticipated the extent of the Fed's interest rate policy and the possibility of a new QE3.
Although the long period of low interest rates and stimulus programs have not led to inflation risks have increased, however, helping to push further downward 's USD.
This could be a harbinger of a strengthening of the dollar during the course of 2012? The answer is yes, because given the current high expectations of low interest rates and extensions of the money supply, an improvement of the economic data would lead the economy to reduce these expectations and thus to an increase in the valuation of the dollar.
Another argument in favor of a strengthening of the dollar is due to the fact that the rate of growth of the U.S. economy is good compared to other developed countries economy.
In addition, the global economic downturn could help the dollar as currency considered a refuge for excellence. We also add that the central banks of Switzerland and Japan have become more aggressive in the devaluation of their currencies.
Moreover, unlike the recent past, the Fed is no longer the only central bank to expand the monetary policy, but it will be added such as the ECB and the Bank of England.
Although the long period of low interest rates and stimulus programs have not led to inflation risks have increased, however, helping to push further downward 's USD.
This could be a harbinger of a strengthening of the dollar during the course of 2012? The answer is yes, because given the current high expectations of low interest rates and extensions of the money supply, an improvement of the economic data would lead the economy to reduce these expectations and thus to an increase in the valuation of the dollar.
Another argument in favor of a strengthening of the dollar is due to the fact that the rate of growth of the U.S. economy is good compared to other developed countries economy.
In addition, the global economic downturn could help the dollar as currency considered a refuge for excellence. We also add that the central banks of Switzerland and Japan have become more aggressive in the devaluation of their currencies.
Moreover, unlike the recent past, the Fed is no longer the only central bank to expand the monetary policy, but it will be added such as the ECB and the Bank of England.
We add also that euro and the dollar tend to go in opposite directions. Any moves in the negative for the euro tends to be a positive boost for the dollar. Of course the opposite also applies, if the European leaders will be able to manage their problems this can lead to a rise in the euro and the dollar down.
Even the U.S. for another grapple with significant budget problems since 2011 and if Congress fails to show signs of being able to reduce the deficit could have a further risk of downgrade with obvious consequences for the dollar.
I would add also that if indeed we have a next QE3 this would be a part to an increased risk of inflation and the other would increase the demand for risky assets such as stocks and a decrease in demand for refuge currencies like the dollar precisely .
A further deterioration could arise from a wave of defaults in the euro area.
Although the possibility of default Greek seems to have been already discounted by the market, the problem is linked to all banks, holders of such securities with a possible domino effect among them, as I explained in a previous article dated May 2010.
Now if in the short term this could result in an increase in demand of the dollar, we can not exclude that this crisis can not hit directly or indirectly with it the U.S. economy and its currency.
I would add also that if indeed we have a next QE3 this would be a part to an increased risk of inflation and the other would increase the demand for risky assets such as stocks and a decrease in demand for refuge currencies like the dollar precisely .
A further deterioration could arise from a wave of defaults in the euro area.
Although the possibility of default Greek seems to have been already discounted by the market, the problem is linked to all banks, holders of such securities with a possible domino effect among them, as I explained in a previous article dated May 2010.
Now if in the short term this could result in an increase in demand of the dollar, we can not exclude that this crisis can not hit directly or indirectly with it the U.S. economy and its currency.
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