http://online.wsj.com/article/SB10001424127887324048904578320553435165458.html?mod=googlenews_wsj
In the article, the effect of Bernake's two-day testimony to the Congress on the currencies and exchange rates have been discussed. Investors want to know whether the Federal Reserve will reduce purchase of assets.
Ben Bernake is the Chairman of the Federal Reserve. His Congressional testimony may affect the markets and the USD exchange rate. A reduction in quantitative easing would increase interest rates and might have create trouble in the financial market at a time when there are some signs of recovery from the recession.
Any change in Fed's policies would also affect the value of the dollar. When the Fed buys bonds, it actually floods money in the economy. Therefore, value of each dollar is low. When the Fed reduces its purchases, there are less number of dollars in the system and therefore the value of each dollar is high. So, an announcement in reduction of asset purchases might increase the value of the USD.
Therefore, high speculation and interest is associated with this testimony.
This is interesting and very true. Yes, this new action is obviously speculated to increase the value of the US dollar. The announcement also ties well into what we just recently learned in class about expected inflation. The fact that the FED announced a reduction of asset purchases, causing many to expect an increase in the US dollar, could result in expected inflation to fall. This could then, in turn, cause interest rates to fall. In addition, this could all happen prematurely to the FED actually taking that action to reduce asset purchases.
ReplyDeleteIf the expectations of the inflation are to decrease because of Federal Reserve ambitions to affect the market and USD exchange rate by decreasing the amount of US currency in the system. This will cause people that live in the states to save their money and a decrease in spending's if the value of the money that they hold keeps increasing but this will allow the government to have a stronger trading benefit because our USD value has increased being able to buy more with our money.
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