I have read countless articles recently regarding the inevitability of QE3. I have disagreed for four reasons.

  1. Price of oil near $100 give Fed little choice
  2. Rising price of food gives Fed little choice
  3. Stock market has risen on air and hype of European bailout giving Fed little reason
  4. Falling unemployment rate (even though it’s totally bogus) gives Fed little reason

    Why should the Fed react when hot air from Europe gave a huge lift to the markets?

    I would have been surprised if the Fed tossed a QE3 bone under those circumstances. And it didn’t. The Forex market responded appropriately:

    • The US dollar rose against all major currencies
    • The Euro sunk to an 11-month low

    Euro Daily Chart

    click on chart for sharper image

    The Euro took out the October 2011 low and is in fact now at lows last seen mid-January of 2011.

    Forex Currency Market

    The US dollar rose against every Barchart-Listed Currency.

    Looking Ahead, What’s Next?

    If the Fed holds off on QE3 and the ECB cuts further, both of which are likely for the near-future, the US dollar will likely strengthen more. However, and as I have pointed out, one cannot look at these things in isolation.

    A downgrade of the EFSF and/or France by rating agencies would be US dollar supportive as would falling demand for commodities from China as noted in China’s Deserted “Fake Disneyland”; Shanghai Prices Down 40% from Peak, Inventory Clogs Market; Pollyannas Proven Wrong; Implications for US Dollar

    Implications for US Dollar

    I have said on numerous occasions, China’s shift from a real estate and construction economy is going to send many commodity prices tumbling. In isolation, this is good for the US dollar, but things cannot be viewed in isolation.

    Currency movements will depend on how central banks in the US, China, Europe, and Japan react to the global slowdown.

    Certainly the Crumbling of Comprehensive Solution No. 4; Treaty “Legally Doubtful”; Cracks and Splinters Everywhere is US dollar supportive regardless of repeated “Pet Lies” by EC President Van Rompuy.

    On the other side of the coin, US deficits are out of control. However, I believe (and the market seems to agree), the other factors are more important in the short-to-intermediate term.

    Mike “Mish” Shedlock
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