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Short This Currency To Profit From The Fed's Twist

This will go down in history as the dark age of free markets. Never before has there been so much market manipulation.

In the past, investors across the globe made decisions based on valuation and growth potential. Now, it seems only one thing matters: what will central bankers do?

This week was no different. Everyone waited to see what the world's most important central bank would do this past Wednesday.

The market wanted the Fed to crank up the printing press once again. Since the Fed has a history of not disappointing the market, expectations were high.

But the Fed, for once, resisted the temptation to print money. What does that mean for the U.S. dollar? Should you buy it?

QE Remains on the Table

Some traders were expecting the Fed to implement another round of money printing, a.k.a. quantitative easing (QE). But the Fed only announced an extension of its Operation Twist - a program where the Fed sells some bonds to buy others.

This is much less aggressive than QE because the Fed doesn't expand its balance sheet with new asset purchases. Technically, the Fed is not really printing any new money.

Does that mean the Fed is done printing?

Well, it's important to keep in mind that the Fed revised its prediction for the economy, saying economic growth will be more anemic than expected. Fed officials also expect a higher unemployment rate and lower inflation.

In other words, growth and inflation are moving lower, while unemployment is heading higher. Everything is moving against the Fed's goal of higher inflation and stronger growth.

I think there's a good reason why the Fed decided not to print: It wants to save some ammunition in case things continue to deteriorate. In fact, the Fed made an explicit pledge to print more money if conditions worsen. Here's what they said:

"The committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability. We are prepared to do what's necessary. We are prepared to provide support for the economy."

The Fed is ready to implement another round of money-printing if they feel it's needed. As I mentioned in an article a few weeks ago, the Fed will print if the current trends of higher dollar, lower stocks and cheaper commodities continue.

What does the Fed's Action Mean for Currencies?

The fact the Fed did not implement another round of money-printing is good news for the dollar. It's bad news for risky assets, such as stocks and commodity-currencies. In the short-term, the dollar should resume its rally against pretty much all currencies.

The chart below shows the price action of the dollar index, which measures the performance of the buck against six other major currencies. As you can see, following the Fed's disappointment, the dollar is rebounding from the support area at 81.50.

Dollar is Ready to Move Higher in the Short-Term

See larger image

Also notice the dollar has been in an uptrend since late last year. It has been making higher highs and higher lows, and its 50-day moving average remains above its 200-day moving average. This trend is set to continue until the Fed decides to print money.

The most important thing for forex traders at this point is to monitor economic data in the U.S. If the economy continues to weaken, the market will try to test if the Fed is bluffing by pushing stocks and commodity-currencies lower. This will cause the dollar rally to continue.