US dollar slips further against the local currency

Fed Chairman Ben Bernanke has delivered QE3, half a month after signaling intentions to do so.

IG Markets Singapore said:

After months of waiting the Fed finally delivered QE3 last night which was slowly being priced into currency markets this week.

The Sing Dollar had already hit a one-year high against the greenback in anticipation that Bernanke would announce another round of bond-buying and weaken the US currency.

And he finally pushed the QE3 button last night which saw the greenback slip even further against the local currency.

This morning it trades at $1.2255 touch a fresh high.

The bond-buying time frame is open-ended so the dollar could face selling pressure for a longer period, once this initial “pop” has subsided.

The Fed also extended its pledge to keep interest rates low until at least mid-2015 which will shift traders’ attentions to higher interest rate environments.

DBS Group Research meanwhile noted:

Fed Chairman Ben Bernanke delivered QE3 yesterday, two weeks after signaling intentions to do so at the Fed’s symposium at Jackson Hole at end-August. Back in 2010, QE2 came two months later in early November after the same Jackson Hole symposium at end-August.

Effectively, the benchmark DXY (USD) index has returned lower into familiar territory when QE1 and QE2 were in play. The first question is whether the DXY will head down to the 72-74 lows seen in the first two QEs. The second is how we get there.

This is as much a euro story as it is a dollar story. Both the Fed and the ECB are keeping their bond purchases options unlimited. Except that the ECB will only initiate its program once a struggling EU sovereign, say Spain or Italy, officially asks for it.

In this regard, the DXY can continue heading lower, until Europe becomes a problem again. The second more important challenge to a weaker USD is the global economic landscape. The world is not coming out of recession like ahead of QE1. Neither is it that weak as today when it was trying to sustain the recovery via QE2.

Eurozone is in recession and still at risk to more downside risks from the austerity measures that must accompany the ECB’s bond buying program. The Fed admitted that its policy is no panacea for the economy, which must still face uncertainties pertaining to the expiring tax cuts by the end of the year.