Thursday, August 26, 2010

Citi FX Strategist Says QE2 Would Devastate USD

"A second round of QE will likely put sharp downward pressure on the USD, to some degree versus the euro and other G10 currencies, with potential for a broader USD sell-off. Foreign investors are likely to view the renewed direct intervention as indicating that the Fed’s balance sheet expansion and implicit monetization of fiscal expenditures are first line approaches to dealing with disappointing recovery prospects, rather than the exceptional measures they were meant to be initially. This could have severe implications for foreign perceptions of the quality of the US assets that they are accumulating in private and official portfolios, and may lead them to draw the conclusion that USD weakness is less a by-product than a desired outcome of these measures...It is difficult to gauge the set of policies that US policymakers will pursue to reduce the risk that the US slumps into a significant slowdown. In the current environment of extremely disappointing growth and apparent lack of response to traditional monetary stimulus, policies that are less than orthodox are likely to be considered seriously. Most of these unorthodox polices are likely to weigh on the USD."