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Why Quantitative Easing Has Affected The US Dollar

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Q: What currencies to do you think will change in value (increase relative to the US dollar) in the near future and why?

A: I actually expect an even stronger dollar in the coming months. While most central banks are still firmly in an easing mode, the Federal Reserve was the first major central bank to remove monetary accommodation.

Quantitative Easing

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Market Realist – Quantitative easing has affected all markets

The graph above shows the Fed’s holdings since 2010. The Fed purchased Treasuries (TLT)(IEF) and mortgage-backed securities (or MBS) of all maturities. The graph illustrates the pace at which the Fed purchased these securities. In QE3 (the third round of quantitative easing) alone, the Fed purchased US$ 1.7 trillion of long-dated Treasuries.

QE was introduced by the Fed during the Great Recession in order to stimulate growth in the bruised economy. This was meant to boost consumption and investment by reducing the cost of funds. QE3, the final round of QE, was slowly phased out and was finally wound up in October 2014.

The program had put downward pressure on Treasury yields, as it created an artificial scarcity of Treasuries. This has helped keep interest rates low. But the winding down of the program since late last year has put upward pressure on yields. Bonds have since underperformed US equities (SPY)(IVV), partly because of that pressure.

Since many major central banks have introduced their own versions of QE, interest rates in those economies are bound to be ultra-low. The US seems to be far ahead, with the Fed poised to increase rates in 2015. This action will attract more funds towards the US, making the dollar (UUP) stronger.

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