The dollar is likely to slump further should the U.S. Federal Open Market Committee hint today at renewing its bond-buying program to support the economy, according to Standard Bank Plc’s Steven Barrow.
The currency “has already fallen sharply in the last month, but history suggests that this could be peanuts compared to what could happen,” Barrow, head of research for Group of 10 countries at Standard Bank in London, wrote in an investor note today. He compared the greenback’s current drop to its decline in 2002, which grew more pronounced after the Federal Reserve moved toward a second round of interest-rate cuts.
Although the Fed is unlikely to announce an “aggressive ease” today, there could be a “tweak” such as a pledge to reinvest proceeds from maturing mortgage bonds and buy more debt, Barrow wrote. The Fed bought $300 billion of Treasuries between March and October 2009 to bring down borrowing costs amid the deepest recession since World War II.
“The feeling in the market is not that the Fed doesn’t know what it’s doing, but that the Fed is sufficiently surprised by events to have to restart easing,” Barrow said in a phone interview. “Even if you go back even just a month or two, the vast majority of people who don’t have as much information as the Fed, but at the same time are supposed to know what they are doing, were all expecting the next move to be a tightening.”
The dollar has declined 2.7 percent over the past three months against developed-world currencies, according to Bloomberg Correlation-Weighted Currency Indexes, amid weaker economic data. It traded 0.9 percent higher against the euro at $1.31 as of 2:30 p.m. in London.
“If the Fed moves in the direction of more quantitative easing, or easing in some other way, the downside could open up really quite substantially for the dollar,” Barrow said.