Dollar weakness continues as QE2 speculation grows

Tom Tong15/Oct/2010Currency Updates

GBP

Sterling jumped to an eight-month high against the dollar on Thursday. The pound also stayed close to a six-month low against the euro as concerns that the Bank of England could ease monetary policy further kept sterling vulnerable against currencies other than the dollar.

Bank of England deputy governor for financial stability Paul Tucker told the Daily Mail newspaper on Thursday that the economy in Britain and globally was yet to find a “sure footing”. The prospect of more policy easing was ignited when one policymaker, Adam Posen, recently advocated renewing quantitative easing in the UK. Earlier this week another policymaker, David Miles, also said that QE could be used. This prompted another BoE policymaker, Andrew Sentance, to vote to raise interest rates, although he is seen as a lone hawk. Speaking on Wednesday, Sentance said UK rates need to start rising gradually to counter the risk of above-target inflation becoming entrenched in the economy.

USD

The dollar slumped against the world’s major currencies on Thursday on mounting speculation that the US will unleash another vast round of quantitative easing.

Investors continued to dump the dollar against the backdrop of Singapore’s move and on rising expectations the Federal Reserve will engage in another round of “quantitative easing” – effectively printing money to buy assets and will be closely watching a speech by Fed Chairman Ben Bernanke on Friday which could provide hints on what the US central bank might do at its next policy meeting on Nov. 2-3.

The US Treasury Department is also expected to issue a report on currency practices of other countries on Friday. The US administration faces a tough call on whether to label China a currency manipulator; a move many US lawmakers say is overdue but one that could throw a wrench into Sino.

EUR

The European Central Bank has taken a wait-and-see approach and appears hesitant to offer further support for the sluggish economy, while the policy makers in the US are expected to embark on a second round of asset purchases in November. Some central banks are more fearful of inflation, while others have warned against the dangers of pulling back to quickly on stimulus. In fact, the European Central Bank said today that raising interest rates could be an effective way to pop asset-price bubbles.

Elsewhere

China said on Friday that the yuan exchange rate must not be used as a “scapegoat” for the United States’ economic woes, ahead of a Treasury Department report that could label the country a currency manipulator. Earlier Friday, China set the yuan at its strongest level since policymakers pledged in June to loosen their grip on the currency.

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Written by Tom Tong

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