Forex News – Why further quantitative easing will hurt the U.S. dollar

Important: This page is part of archived content and may be outdated.

The U.S. dollar weakened today mostly against commodity-linked currencies like the Canadian and Australian dollar due to increasing speculation ahead of the Jackson Hole, Wyoming meeting on Friday that the Federal Reserve Chairman Ben Bernanke might announce further quantitative easing to stimulate the ailing U.S. economy

At last year’s Fed summit Bernanke signalled at new measures in quantitative easing which in fact did eventually become a $600 billion ‘quantitative easing’ bond-buying program, known as QE2.

Quantitative easing increases the amount of dollars in the monetary system, pushing down the currency’s value and U.S. interest rates. That encourages investors to seek higher returns in other currencies that carry higher interest rates or move to investing more in stocks rather than currencies.

The Fed Chairman is under pressure to take some measures to tackle the global economic turmoil that is going on. But on the other hand, some think it would be wrong if he did implement QE3.

“It would be a mistake to signal an inclination to move ahead with another round of asset purchases. The inflation rate is moving up and is close to the upper bound of the Fed’s informal target,” said Marvin Goodfriend, a former senior Fed official and now an economist professor at Carnegie Mellon University.

As data indicated recently, core consumer price inflation in the U.S. rose at a 1.8% year-on-year rate in July. Additionally, Last Wednedsay’s PPI report came out better than expected and the data show that deflation is unlikely.