Shocking the Markets into Action

Posted March 18, 2009

The US dollar fell quickly as the US Federal Reserve announced what is in effect a policy of quantitative easing by agreeing to add another $1 trillion plus to the economy. The effect of this decision led to quick responses in world currency rates.


The US Federal Reserve finally dived into a quantitative easing policy without using the words.   The US is getting ready to print at least another $1.15 trillion which will be used to buy longer term Treasuries and mortgage bonds.   The US has now committed to intervening in the Treasury market in the hopes the spending will underpin the global markets.

The decision by the Federal Reserve is seen as an acknowledgement that nothing else tried to date seems to be working and went for the equivalent of a shock to the heart.  The responses were swift.  The benchmark 10 year note yields fell at a rate not seen since 1962 and settled at 2.48% by the end of the day 18-March-2009.  The mortgage rates are already dropping.  The US dollar fell more than it has since 2000.

The US dollar weakened against the euro to $1.3491.  It also fell against the yen to 98.60 yen per dollars; the Swedish krona to 8.0975 krona per US dollar; and the Canadian dollar to C$1.2499.  The Dollar Index weakened to 84.595.

One of the fears that goes hand in hand with a policy of quantitative easing is a chance of igniting inflation.   The US addressed this concern by indicating officials believe the recession will keep prices from roaring out of control. 

Flooding the credit market with cash will have global consequences.  Indeed, the currencies were quick to respond to the Federal Reserve move.  Emerging markets saw the US announcement in a positive light and foreign stock markets rallied.  The emerging markets believe the action will lead to higher commodity prices which will create GDP growth as a result.

Brazil’s real rose for a third ay in response to the US Federal Reserve announcement.  The real strengthened to 2.2604 real per US dollar.   In an unusual occurrence, the real and the Bovespa both rose. 

The US greenback sank, but the Canadian dollar rose more than it has in over 3 weeks.  The Canadian dollar strengthened to 80.12 US cents.  Canada has the same hope as emerging markets that the US government policy will loosen the credit market and lead to commodity price increases. 

The UK pound weakened against the US to 93.80 pence per US dollar.  It also fell to 94.87 pence per euro.  The UK got the bad news that UK joblessness now stands at over 2 million people.  It has not been that low since 1997.  The country faces a prolonged recession even after surrounding Euro-Zone countries begin recovering.

The Bank of England officially instituted a policy of quantitative easing at its March 5th meeting.  The benchmark interest rate was reduced to .5% and the bank has plans to buy 150 billion pounds of assets.

Japan’s recession is clearly still deepening.  Though the yen strengthened to 96.29 yen per US dollar, it weakened against the euro to 128.80 yen.

Still to come are the details of a plan US Treasury Secretary Timothy Geithner has been working on to scrub toxic assets from bank balance sheets.  He is still pursuing a joint public-private approach which remains a bit of a mystery.

The currency markets have been somewhat quiet recently but yesterday saw shockwaves shuddering through currency and equity markets around the world in response to the US policy of quantitative easing.  If US mortgage rates fall as expected it is hoped the housing industry will come back to life and kick-start the economy once again.