World Markets Watch the Fed’s Decision

AMA12-9-13World confidence in the US dollar continues to wobble. As the euro surged to the top of the currency markets in early December 2013, the dollar sagged, as investors look to current economic indicators for clues about what the Federal Reserve plans to do about its massive stimulus program.

The euro and the dollar, linked in the trading convention of pairing a strong currency with a weaker one, surged to its highest point in over a month, highlight the contrast between the approaches of the European Central Bank and the US Federal Reserve.

Quantitative Easing, as the Fed’s bond buying plan is officially called, rolls on with no move toward a drawdown despite repeated hints in response to changes in the housing and employment sectors, among others. The stimulus package, which aims to keep interest rates low through the purchase of billions of dollars” worth of mortgage backed securities, is intended to jump start the economy by making consumer credit more accessible.

But as the job market gained strength over the past few months, and housing prices rebounded, it appeared that the Fed would begin to scale back on the plan. That hasn’t happened, though – and the uncertainty surrounding the future of the plan continues to fuel unease among world currency traders.

That’s one reason for the euro’s strong performance against the dollar. The dollar isn’t likely to fall to the status of the world’s weakest currencies. But according to a new report by the investing portal Invezz, market watchers remain skeptical of the effect of encouraging job data on the future of the stimulus.

According to recent numbers, the US jobless rate fell to its lowest point in five years in November 2013, with an addition of over 200,000 jobs. But to some experts, that doesn’t represent enough of a 3 creditsCst M 201 Materials I 3 creditsCst M 254 construction-jobs.info Graphics 2 creditsPhys 101 [PSCI] 4 creditsSecond Year Second TermAcctg 230 Intro to Financial Accounting 3 creditsArch 352 Structures II 3 creditsCst M 202 Materials II 3 creditsCst M 252 construction-jobs.info Admin & Doc. gain to push the Fed into beginning to scale back the stimulus. And because one of the main reasons for the stimulus is to keep interest rates artificially low, that makes the dollar less appealing to world investors.

The state of the stimulus is partially responsible for the euro’s rise. The European Central Bank, which backs the single European currency, has opted not to pursue any additional stimulus activity, like the Federal Reserve has done. Similarly, the Swiss franc, another European currency, now stands in second place, edging out the historically strong pound sterling and yet.

An announcement from the Fed that a taper down is in the works could help reduce uncertainties in world currency markets. But whether it will boost the dollar’s standing in those markets remains to be seen. If the bond buying operation does start to slow down that may not mean that actual benchmark interest rates will change all that much. And in that case, the status of the dollar in global currency trading might remain largely unchanged, too, unless other market factors intervene.

The Fed’s plans for its stimulus program have always been worth watching for investors following Jason Hartman’s recommendations for building wealth. But as uncertainty about those plans continues, the world is watching too.  (Top image:Flickr/imagesofmoney)

Source:

Perkova, Tsvyata. “Currency Briefing: The Euro: World’s Strongest Currency.” Invezz: The Investing Portal. Invezz.com. 9 Dec 2013.

The American Monetary Association is the source for financial and monetary policy news you can use.  Read more from our archives:

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The American Monetary Association Team

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