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.


1 comment:

Matt Franko said...

Agree with your USD point.

Debasing the Currency Crowd question of the evening: "How is the Fed eventually going to shrink it's balance sheet once they bring these securities on? It's going to be very difficult!" (In their best prospector voice)

Could you help with the reserve accounting:
1.The forex swaps will just not be renewed and go away right? (Foreign CB reserve account debited and Fed asset deleted?)
2.The MBS will eventually just run off when the homeowners re-fi or sell the house in a few years? (new home buyers reserve account will be debited and Fed MBS asset will be deleted?)
3.For Treasuries, in 5 years, a 5-year Treasury will be refunded as normal(the Treasury account at the Fed will be debited and the Fed will just return the bonds to the Treasury?)
I think these 3 items will constitute the majority of the balance sheet.
Id appreciate your help in trying to work this through...