USD Correlation to QE2

Bernanke says QE2 purchase of $600bln in US Treasuries is to create jobs: Theoretically, yields go down pushing investors into riskier assets – market goes up – investors feel richer – spending goes up – businesses hire more workers – economy grows

Reality: Yields are already at all time lows and businesses are not hiring because of a lack of demand. The Fed is in an exchange-rate war to push down the USD, dubbed a form of “financial aggression” by Michael Hudson. The plan puts the dollar under severe pressure and emerging markets will throw up protectionist barriers and monitor capital flows to regulate their own currency. The potential effect is a weakening of currencies across the board.

Q: Why would the USD go lower?

A: Quantitative Easing is another word for printing money and flooding it in the market. Increased supply devalues the dollar.

Q: Why would the USD go higher?

A: QE2 news is built into the market. USD is at all time lows. Bernanke is being pressured not to flood the market with a this second round of excess capital. During market weakness, investors look to move capital to less risky assets (out of the market and into metals and USD).

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