Monday, November 22, 2010

QE2 Red Shifting

The Dollar Index measuring the currency’s performance against those of six major trading partners has climbed as much as 5.1 percent from its low this year on Nov. 4. Futures traders have slashed bets for a decline in the dollar against the euro, yen, Australian dollar and Swiss franc, data from the Commodities Futures Trading Association in Washington show.

Leaders from Chinese Premier Wen Jiabao to John Boehner, the nominee to be the next speaker of the House of Representatives, have said Fed Chairman Bernanke’s plan to print money and buy $600 billion of U.S. government debt will cause instability and faster inflation. The $4 trillion-a-day currency market is signaling the Fed’s strategy is unlikely to debase the dollar as long as the economy continues to strengthen.

No net effect. Furthermore, the risk is tilted to the deflationary side (given the context of the current environment of banking malaise, etc.) since swapping interest bearing assets (bonds) with non-interest bearing assets (cash) removes current and future income streams from the economy.

In astronomical terms, whatever effect QE2 was supposed to have is Red-shifting at a large and increasing rate.

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