US dollar, 2012 vs. 1996, again19 September, 2012, 22:23. Posted by Zarathustra
We noted that the US dollar did tend to weaken when the Fed expanded its balance sheet, but the Fed did tend to announce and/or start balance sheet expansion during periods of financial stress, and the stress in the market subsided when the Fed expanded its balance sheet, so the market was in risk-on mode. We all know what risk-on/risk-off is like: during risk-on, dollar weakens, risks get bought, and the opposite is true during risk-off, more or less.
The new round of QE-infinity is not initiated on the back of increasing market stress nor threats of deflation. Rather, it appears that the Fed puts more weight on the full employment part of its dual mandate then it did. The chart below from Barclays show clearly that this new round of action started without marked increase in market tension.
With QE-Infinity on, will the following analogy of US dollar still hold?
Source: Federal Reserve