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Will the Fed's news be good or bad for the dollar?
08/12/2009 11:45 pm EST
The answer is important to more than just currency traders: the dollar is likely to be the major driver for stock prices in the rest of August.
Just as it has been for the past few days.
On the one hand, the Fed said the economy is stabilizing. The financial markets always hear that as "The economy is recovering" so that's a plus for the dollar.
On the other hand, the Fed said the economy was still weak enough so that it didn't see a need to raise rates for a long, long time. The market heard that as, Not until 2010 at the earliest. Lower yields aren't good for a Treasury that has billions upon billions of bonds to sell to pay for the federal deficit. This is a minus for the dollar.
And on the third hand,the Fed announced that it would end its program to buy Treasury bonds in the open market in October, just one month later than originally scheduled. That will hurt bond prices and send yields up a bit, but on balance this is a plus for the dollar. Wall Street and overseas investors are very, very nervous about how and when the Fed will start exiting the market and shrinking its balance sheet.
When the Fed instituted this buying program in March, the dollar fell. It's likely to rally on news that the Fed is getting back to normal policy parameters and ending all that fancy-shmancy quantative easing stuff no one really feels very comfortable with.
If you can find a clear trend in this, you're a better market reader than I am. (Or at least a more imaginative one.) I think what the Fed has done has ushered in at least a short period of dollar rallies followed by dollar corrections followed by dollar rallies as investors recalibrate their understanding of risk among currencies.
I'd expect that stocks will respond to this slopping around with their own version of an indecisive August.
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