Dollar Set to Rise Again

The Federal Reserve will be making an announcement today. The world is waiting with baited breath (at least feigned) to decide whether the bubble busts or it continues to grow in size as Ben Bernanke decides to cut back and taper quantitative easing or continue down the narrowing road that will turn the Federal Reserve into a straight-jacketed asylum seeker. But where will it run to hide? If it continues, it will be slated. If it stops it will get more than just squashed tomatoes thrown in its face. It’ll have to choose today.

In the meantime, the markets have the jitters. The Dollar has even tried to find support and prove that it is indeed not quite ready to have the coffin lowered into the ground just yet. But, that seems like it was only temporary this morning.

Looks like the markets are getting ready for an announcement. The Euro lost some ground in comparison with the dollar awaiting the FOMC statement. At 09.30 GMT, the Euro stood at $1.3391 which was a fall from $1.3396 yesterday. The euro also fell against the Yen from 127.76 Yen late Tuesday to 127.29 today. The dollar fell slightly, however, against the Yen from 95.37 yesterday to 95.05 Yen this morning.

But, is that surprising? The Federal Reserve has managed to somewhat artificially dilute the dollar by injecting more greenbacks into the economy to the tune of $85 billion per month. The prospect of withdrawing that or at least tapering the quantitative easing means that the dollar will be less diluted. That will mean that its value will increase in comparison with other currencies.

Euro vs. Dollar

Euro vs. Dollar

The markets are showing therefore in the main that there will be a tapering of that program that will be announced today. The dollar may well fair well against the euro but we shall see how the markets react and whether stocks increase or fall. My bet will be on the latter. Whatever happens it seems that it will be very difficult given the volatility of the markets over recent weeks to do anything else but see the value of stocks decrease in the wake of that announcement today.

But, according to analysts there are a couple of countries that might come out of all of this with greater benefits. One such currency is the Mexican Peso that has seen its value plummet by 8% against the dollar in a short space of time. The South African Rand has also had to deal with big losses (up to 12% over the same period of time). Emerging markets have suffered from the markets’ fleeing from them into safer havens such as the Swiss Franc and the Japanese Yen. The Franc and the Yen may end up suffering the consequences if the Fed pulls the plugs on quantitative easing.

Analysts believe that the Mexican Peso may benefit from the exit of the Federal Reserve from the stimulus plan because (unlike India or South Africa, for example), they have a strong current-account deficit. Other countries have larger current-account deficits and this may cause problems for them if the Federal Reserve pulls out. Mexico’s economy is strongly linked to that of the USA’s and tends to mirror what’s going on there. If the Federal Reserve pulls out on the stimulus plan, it’ll be because employment is improving and the economy is doing better overall. That means that Mexico will look like it will have the same thing to come and so investors will see it as a good opportunity and go back into the Peso.

Just last week the Peso rose to its highest point ever for the past 21 months. The Euro fell today against the Mexican Peso, down 0.15% (0.0257) to 17.2435 Pesos. The Dollar also fell against the Peso by 0.23% to 12.8664.

Mexican Peso

Mexican Peso

This afternoon (13.00 GMT), however, the Dollar decreased against the Euro. The Euro rallied by 0.07% at 1.3401 Dollars. The Dollar also continued to fall against the Japanese Yen (down 0.31% to 95.0300).

See-sawing back and forth, nothing looks as if it is set in stone. But, one thing is for certain, the Bernanke binge on the greenback hasn’t been doing the market any good at all.

The Federal Reserve meeting will be drawing to a close this afternoon and the financial markets are waiting. Bernanke will be leaving whatever the decision that is taken. But, will the statement that gets made today be clear-cut and as limpid as the financial markets might want. Perhaps, that’s part of the tactic. Peter and the Wolf; not a patch on Ben and the Fed? We’ll end up not believing you, Ben if you carry on telling us it’s coming any minute now! When it gets here, well, just see it fizzle out and go down like a wet firework. Who knows?

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