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QE2 looks more likely, what will be the impact?

|Includes:UDN, PowerShares DB USD Bull ETF (UUP)

Japanese intervention to deal with the slipping dollar could become very real with impending Federal reserve announcement on Wednesday. The US dollar is at a record low against the Yen harking back to 1995 levels of 79.75 yen. Gold is slipping higher at $1,350/ounce, but there there is a consistent reluctance to take one side or the other till QE2 news hits.

The U.S. dollar fell against the Australian dollar after the Reserve Bank of Australia unexpectedly hiked its key policy interest rate.Australia’s central bank lifted the key rate by a quarter-point, bringing it to 4.75%, concerned about inflation risks ; the first rate increase since May of this year.  The US and Aussie dollars are almost trading at parity now with the Australian dollar right about $99USD.

All this with elections today that could result in a swing to a Republican House majority in the US Congress...meaning that less could happen than more in terms of continued stimulus, but more than less in terms of extending tax cuts. And of course the jobs report on Friday, will drive signals about how the US is gaining or lagging in economic recovery. A weaker currency appears to be the prize in this environment. But the rise of the US dollar pushes commodities higher...around the world. Maybe an unwanted short-term impact, but does not seem to be a concern that will override the US stimulus efforts.

Could this result in a coordinated response from global central banks to prop their currencies? Probably, but "coordinated" is not likely.

Crude, gold, copper, metals and emerging currencies should all benefit from Helicopter Ben if he does in act push QE2 as anticipated. At a minimum, the dollar should push lower if the quantitative plan takes effect. The resulting effects and trades are still unclear. If you do not have an extremely strong appetite for volatility, this may not be a good week to be exposed to long or short leveraged dollar ETFs like UUP on the long side or UDN on the bear side.

And there could be a little "shake and bake" volatility here for commodity names as well before they resume their climb. Remember, the commodity boom is based on both dollar weakness and strong underlying demand from China and other emerging markets we cover around here. 

Disclosure: no positions
Stocks: UUP, UDN