The Dollar Drop

After the release of Fed’s FOMC statement, it was not just the Treasuries’s yield which plunged.  Because of the tremendous amount of money that will be printed to fund the additional trillion-dollar spending that will be made for mortgage-backed securities, LT securities, and agency debts, the dollar just had to loosen up. By a lot.  Borrowing the following table from Paul’s blog:

forex_2

Compared to major currencies, the Euro and Pound saw almost 3.5% and 1.6% increase, respectively.  Similarly, the dollar weakened against the Yen, dropping by more than 2.5%.  The biggest drop of past 4% was seen against the Swedish currency. Here’s how I see things:

The thing is, this is a multi-faceted problem. While there are still concerns about the toxic assets, there’s also the problem of a slump in global demand. Solving the problems of banks alone wouldn’t bring back all the “lost” demand; or if it does (through a wider availability of credit), it would take much longer if it was the sole solution laid out on the table. And that even assumes that with better financial institutions and better lending activities or whatnot, we can rely on domestic consumers.

Maybe by doing what it did, the Fed hopes not only to improve US demand but also outside of it, helping out companies that rely so much on international operations to improve business operations. So it might have been a big dip for the dollar, but it’s the dip that would taste good later on.

Furthermore, with no other direction for the Fed funds rate to go, Bernanke and the gang had to resort to other alternatives. Deflation is the problem at the moment and before any bubble could again form, I’d give the admin the benefit of the doubt that after this horrific event, they wouldn’t be so quick as to let the markets act by itself, without some form of government intervention. Hey, we have Obama up there anyway.

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