Wednesday, March 18, 2009
Fed move NOT bearish for dollar
The dollar has had a huge downward spike following the Fed's announcement that it will buy long-term bonds.
This is reflex selling by market participants who do not understand the ramifications of the Fed's move and I believe this weakness will pass relatively quickly.
The Fed's buying of securities is how it brings interest rates down, in this case, for a specific point along the term structure (longer term interest rates).
It adds to reserves, yes, but that has no impact on the dollar. Reserves are not part of the money supply and this is not printing money.
It is NOT buying bonds from the Treasury or monetizing the debt; it is buying securities from the public.
Interest rate differentials are not the driving force in Forex markets at the moment. If anything, the ECB has yet to catch up when it comes to rate policy, and that is bearish for the euro.
The Swiss National Bank has said it will sell the Swiss franc to counter deflationary forces.
Many foreign banks still have huge dollar liquidity needs and, therefore, demand for the dollar is likely to grow, not fade.
I WOULD SELL THE SWISS FRANC, JAPANESE YEN AND EURO ON THIS SPIKE!!!!!