Fed Consideration Of QE3 Hurts U.S. Dollar

Includes: FXE, UDN, UUP
by: Ralph Shell

Release of the recent Fed Minutes showed active consideration of QE 3, a perceived stimulus for the globally lethargic economies spreading beyond U.S. shores. Chicago Federal Reserve Bank President Charles Evans, in China, urged China to join the U.S., and increase the money supply to stimulate the global economy.

A frequent complaint to this type of monetary stimulant is that the central banks have no idea where the money will be spent. Some claim it causes commodity inflation, and from experience I know there is nothing like a good bull market in commodities to enrich Chicago traders. Today gold raced ahead $35 per ounce following the easing talk. Is this why Chicago Federal Reserve President Charles Evans is such a bellicose supporter of QE 3? It helps the home town economy.

Many of the US reports since the last FOMC meeting have been somewhat better than anticipated. This prompts some analysts to caution that a decision concerning a new round of stimulus may not commence until October, if at all. However, U.S. Initial Jobless Claims Number at 372K was worse than expected, serving to elevate the chant for more stimulus.

Other traders are hoping the 2012 Jackson Hole Symposium of Central Bankers, which begins next Friday, the 31st, will be a repeat of the 2010 Meeting when Bernanke announced QE 2. The futures specs are short the euro versus the USD, FXE and UUP are up ahead of the Jackson Hole meeting, and we are likely to see more nervous shorts bail.

Personally I think the chances are slim Bernanke will immediately embark on a definite change of policy prior to the election, fearing flack from both political parties. For example, where would the price of oil, now almost 98/Barrel for WTI crude, go if we began QE 3 in September? Combine this with a US Gulf hurricane. Currently gasoline is creeping back to 4.00 a gallon, a price that will lose Democrat votes, and quite possibly the election for Obama.

On the Republican side, there is ample opposition to the Keynesian, big deficit spenders, combined with the loose money policies of the Fed. Some want to audit the Fed, and others are just suspicious of their activities. Chances are QE 3 would result in a move to retire Bernanke, if the Republicans are to take over.

We indicated in our note on the 21st, Euro Rallies on Outbreak of Optimism, that the euro could gain on the USD. Such has been the case with the Fed's help. Merkel and Hollande are trying to make some compromises for the Greek Prime Minister Samaras but German Finance Minister, playing the part of the grumpy old man, is objecting.

Ahead of the Jackson Hole meeting, however, it looks to us the USD can weaken versus the euro, but going forward into September we will be looking for a higher level to be a seller of the euro.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.