Greenback stands tall

The US Dollar has rallied so far this week despite expectations for weakness following the Fed’s announcement of QE3. Greenback stands tallIt virtually appears to be a case of sell on rumour, buy on fact.

Admittedly the US Dollar usually does weaken following QE with the USD index falling during the full periods of both QE1 and QE2 (-4.6% and -2.9%, respectively).

The contrasting argument in provision of a stronger US Dollar which appears to be supported by the massive decline in USD positioning over recent weeks and over 5% drop in the USD since 24 July is that the market has already priced in a lot of QE expectations into the currency.

Furthermore it will likely play positive for the Dollar the fact that the Fed is not alone in increasing its balance sheet.

Many central banks are striving to uphold very easy monetary policy.

The consequence of this is that there is a battle of the balance sheets in progress that does not necessarily involve the USD being the underdog.

The euro/ US Dollar currency exchange rate has dropped well off its recent highs around 1.3173, with emotion for the currency souring due to fumbling by the authorities in Spain on requesting a bailout and disparities over how to proceed on several issues including banking supervision.

The drop in the September German IFO business climate survey, the fifth in a row, did little to help the euro, with the survey adding to eurozone growth worries.

Gradually it looks as though single European currency short covering is running its course and while there may yet be a further bounce in the EUR should the ECB begin its bond purchase program, the near term outlook is more fragile.

Elsewhere five of the UK’s biggest lenders have signed up to the ‘funding for lending’ scheme which has been designed to encourage activity in the economy by making cheaper loans to firms and individuals.

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