Score one for the dollar! The greenback knocked its major counterparts off the charts early this week, and nope, it’s not just because the euro is taking the heat for its debt problems.
Last Monday, a few Republican-lawmakers took potshots at U.S. Fed Chairman Ben Bernanke by questioning the Fed’s decision to inject an additional 600 billion USD stimulus program in the economy.
The criticism from the Republicans signaled inconsistency in the government’s and the Fed’s stances on the economy, which consequently boosted 10-year Treasury yields to a two-month high. If you’ve been attending the coolest forex school ever, you know that high bond yields often attract investors. As a result, the U.S. dollar index, which measures the performance of the Greenback versus a basket of currencies, rose to its highest level in six weeks.
So why is the Federal Reserve on the political hot seat?
Well, rather than stimulate employment, the Republican party thinks that the Fed’s 600 billion USD quantitative easing program will only trigger a wide-reaching case of hyperinflation. Who could blame them? What tells them that this version of QE, which is roughly half the size of the first program, will work? That’s right – nothing.
As we have seen in the past few weeks, the Fed’s decision to do another round of QE has greatly weakened the dollar. While this may help the U.S.’s export industry, the depreciation of the dollar obviously doesn’t sit well with importers.
If you think the importers are going to just sit back and take the hit, then you’ve got another thing coming! Who do you think be holding on to the short end of the stick when import prices rise? Take a wild guess – it starts with a Y and ends with an OU! More often than not, businesses pass on additional costs they incur to their customers.
However, it seems to me that these politicians will just have to settle with sticking their tongues out to the Fed for calling the shots on QE2. Ideally, the central bank should be independent from politics so, at the end of the day, it’s still Big Ben’s take on the economy that matters. Boo yeah!
For the time being, I have a feeling that the ongoing debate on the Fed’s move will be bullish for the dollar. Even though the criticisms are a pain in the Fed’s butt, they do offer a ray of hope for the markets that the quantitative easing program could end much earlier than planned.
Who knows, these politicians could be right about additional stimulus measures being unnecessary. But I wouldn’t hold my breath for Big Ben to announce an early QE2 exit. Until we see the positive reports to indicate that the U.S. economy is right on track to recovery, then expect QE2 to continue!