Quantitative Easing puts pressure on the USD

Last night the Federal Reserve announced that it will pump $600 billion into the US economy by the end of June next year to boost their fragile economy. The move known as quantitative easing will purchase around $75 billion of asset purchases such as bonds each month. The FED also left the base rate of interest on hold at 0.25% which means they cannot reduce rates any further in order to boost demand – the more traditional policy used by central banks to stimulate growth.

QE tends to vigorously weaken a currency when it is introduced to an economy. The dollar has weakened 11 percent versus the euro since August, when Fed Chairman Ben Bernanke said the central bank would “do all that it can” to sustain the economic recovery.

The markets were expecting $500 billion of asset purchases so when $600 billion was introduced the USD weakened to levels not seen since January against the Euro and for 9 months versus sterling exchange rates.

The coming weeks could bring some excellent buying opportunities against the USD and I would not be surprised to see levels lingering above 1.60 for the foreseeable future.

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