Cashing of the Dollar and Exporting the Deficit. A FED’S salvo..

 

The FOMC Meeting concluded on 9th August. The FOMC released its ‘ Statement’ Post Meet. The Commentary described US growth outlook as dismal and revised the GDP target lower and clarified that, “ FED rates shall remain low till Mid 2013”.

Each of the market made its own assessment and reacted accordingly.

US Bond Markets :

The Yield on 1, 2 and 3 years Crashed and the instruments became only a ‘ Paper ‘ with no value addition. i.e. the paper is expected not to earn you any interest and/ Or is converted into notch better than, overnight T-bills. Or say this bonds are now at par with Cash , i.e. value of Dollar.

Impact :

The weakening USD Index remained study and allowing all other markets to fall, including currencies. Gold, which had rose to $1810, is now settling for a @ $1730-35/. Crude Oil and Dow, now stands recovered 4% from the bottom.

The Volatility spike represents a sense of confusion and chaos among investors.

FOMC’s action may achieve many objectives simultaneously.

1) Dis-incentivised Banks from the short term bond markets, totally.

2) Putting the risk baggage on banks, who are shunning the risk and living on the short term rates.

FED Moves, Dollar and International Trade:

    Foreign Bond Holders, in particular the Countries, which hold Short Term Bonds, to maintain ‘ dollar Currency Reserves’ will now not Earn, anything. Thus cashing  the money held by many countries in terms of Short term US bonds, is now availed, freely.

This injection of Liquidity is without immediate Cash commitment, caveat being that this countries will keep  short term Bonds for financing international and US trade Commitments, in short term. The Clear Targets are China, Europe and India.

The Move stands at loss to US, if they prefer to sell bonds, and take cash. Here, then such countries are taking risk of currency volatility and International Trade in US Dollar. The biggest loser is China, who has been keeping its currency undervalued.

Supporting Dollar and Exporting Inflation.

As the countries and Non-US Banks, will have to Charge extra or recover this cost from there natives. And, As the Dollar firms up or stalls it fall, the pressure on their own currencies is bound to rise. Thus, the inflation  and rise in Cost of Money, will raise the demand for Dollar in short Term. The incentive to remain in commodities will remain high, particularly in non Gold format.

This Policy may be detrimental, if US Whither this advantage and does not recover. The stakes are now total and cut throat.