Courtesy of Mish
I have read countless articles recently regarding the inevitability of QE3. I have disagreed for four reasons.
- Price of oil near $100 give Fed little choice
- Rising price of food gives Fed little choice
- Stock market has risen on air and hype of European bailout giving Fed little reason
- Falling unemployment rate (even though it’s totally bogus) gives Fed little reason
Why should the Fed react when hot air from Europe gave a huge lift to the markets?
I would have been surprised if the Fed tossed a QE3 bone under those circumstances. And it didn’t. The Forex market responded appropriately:
- The US dollar rose against all major currencies
- The Euro sunk to an 11-month low
Euro Daily Chart
The Euro took out the October 2011 low and is in fact now at lows last seen mid-January of 2011.
Forex Currency Market
The US dollar rose against every Barchart-Listed Currency.
Looking Ahead, What’s Next?
If the Fed holds off on QE3 and the ECB cuts further, both of which are likely for the near-future, the US dollar will likely strengthen more. However, and as I pointed out the other day, one cannot look at these things in isolation.
Falling demand for commodities from China is also net dollar supportive (in isolation), as would be a downgrade of the EFSF and/or France by rating agencies.
Certainly the Crumbling of Comprehensive Solution No. 4; Treaty "Legally Doubtful"; Cracks and Splinters Everywhere is US dollar supportive regardless of repeated "Pet Lies" by EC President Van Rompuy.
On the other side of the coin, US deficits are out of control. However, I believe (and the market seems to agree), the other factors are more important in the short-to-intermediate term.
