1. End of the Fed’s QE2
Recall that the Fed rocked the airwaves last November when it said that it was going launch a part deux of its Quantitative Easing program, or the project of buying up government securities in order to inject more money into the economy.
Well, the program is about to expire at the end of this month, and with the Federal Reserve announcing that it’s not planning on making the program a trilogy just yet, some investors are slowly releasing their breaths.
Okay, maybe the Fed also mentioned that it will reinvest the proceeds from principal payments of the treasuries that it bought, but the lack of plans for a QE3 is still leading the markets to believe that the Fed might soon consider moving out of its uber accommodative monetary policy stance. Heck, some are even pricing in interest rate hikes!
2. Fear in markets
A more popular reason for buying up the dollar is the good ol’ risk aversion scheme.
Last week alone, the Volatility Index (VIX), also known as the “fear gauge,” jumped as much as 15% on news on Greece debt problems and oil price fluctuations.
What we can take away from this tidbit is that markets are still uncertain about the global economy. And we all know that in times of uncertainty, investors flock to low-yielding assets like the dollar.
3. Money has nowhere else to go
Think about it… Out of the major economies, where else can investors really want to put their money?
Would they want to invest in Euro zone?
Even if the Greek parliament was able to garner a vote of confidence, the fact is that markets are still very nervous of a potential debt default.
Last Friday, the threat of a debt contagion boosted the cost of insuring against default on European lenders just a few points shy of its six-month high.
Also, a report made by the Bank of International Settlements (BIS) showed that European lenders reduced their holdings linked to Greece by a whopping 30% to 136 billion USD in 2010. What they basically did was they wrote down the value of their debt holdings and did not renew loans
How about Japan?
Considering how aggressive the Bank of Japan (BOJ) has been with implementing programs that inject money into the economy in the hopes of boosting growth, I don’t think Japan is an option either.
Just two weeks ago, the BOJ announced a huge six billion USD lending program to provide assistance to the earthquake-stricken economy. The most recent GDP report showed that Japan has plunged back to recession as its economy shrank for the second straight time last quarter.
For now, it seems like the major market theme is dollar strength. Whether this will continue or not is still up in the air. What’s important to keep tabs on is the situation in Greece. If the bailout pushes through without a hitch, then market sentiment could do a 180 degree turn and go bearish on the dollar and bullish on everything else!