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Fed Quantitative Easing Hurting Dollar

|Includes:PowerShares DB USD Bull ETF (UUP)

During the 2007/2008 stock market crash, the Federal Reserve began a strategy known as quantitative easing to try and breathe life back into the economy. This involved taking an active role in the market by way of printing money, then using that money to buy things like mortgage-backed securities and other financial assets in order to make the markets liquid again. The hope behind this strategy was that it might convince banks to free up credit for businesses hurt by the recession, who could then start spending money again and get the economy up and running. This policy is very bank and stock broker friendly, as the banks and financial companies tend to be the initial beneficiaries of this newly printed money.

However, there are a number of reasons for a stock broker to be wary of quantitative easing, first and foremost being that it hurts the dollar. The dollar, like any other currency, goes down in value when there are more dollars in circulation. Already on shaky ground due to government debt and previous QE policies, only the far greater crisis with the euro has kept the value of the dollar from falling any further. The pre-eminence of the dollar has played a huge role in the United States' financial success, because other countries invest in U.S. currency, but with the dollar falling in value, the U.S. position as the economic center of the world could be in jeopardy.

Quantitative easing is designed to put as much liquid currency into the markets as possible to convince banks to invest in the small businesses that drive our economy. However, in this globalized investment economy, the value of the dollar in relation to other world currencies may be more important to the health of U.S. finances. Every U.S. stock broker should be concerned about how far their dollars will go in the future. In the mean time, the value of the dollar drops, the Federal Reserve continues to suggest further quantitative easing procedures to try and fix the economy.

Check out the graph of the following Dollar Index ETF and you can see what we mean:

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Disclosure: No Positions

Disclosure: No Positions

Stocks: UUP