At a time when foreign officials and U.S. lawmakers are criticizing the Federal Reserve's plan to buy Treasury bonds, known as quantitative easing, the currency market is voting in favor of it. IntercontinentalExchange's (ICE) Dollar Index, which measures the currency against those of six major trading partners, fell after Chairman Ben Bernanke signaled the Fed's move on Aug. 27. After the formal announcement of the plan on Nov. 3, though, it climbed 2.9 percent through Nov. 22. Futures traders have slashed bets for a decline in the dollar against the euro, yen, Australian dollar, and Swiss franc, data from the U.S. Commodity Futures Trading Assn. show.
Strategist forecasts for the dollar to weaken have all but disappeared. Since mid-October, the average of 38 estimates in a Bloomberg survey has been for the currency to trade at about $1.36 to the euro by mid-2011—just where it was on Nov. 22. "The dollar has found a bottom," says Lane Newman, director of foreign exchange in New York at ING Group (ING).
Political figures from Chinese Premier Wen Jiabao to Representative John Boehner (R-Ohio), the nominee to be the next Speaker of the House, have criticized the Fed move to buy $600 billion of government debt. Boehner says the policy risks weakening the dollar and fueling asset bubbles.
Bernanke defended the quantitative easing in a speech on Nov. 19 in Frankfurt, saying that boosting U.S. growth is the best way to underpin the dollar and support the global recovery. Economists at London-based Barclays Capital (BCS) said in a Nov. 19 report that U.S. growth will accelerate this quarter from 2.5 percent in the three months ended Sept. 30, while the 16-nation euro zone goes through "turmoil" as it fashions a bailout for Ireland.
UBS (UBS), the second-largest currency trader behind Deutsche Bank (DB), raised its one-month forecast for the dollar to $1.30 per euro from its previous estimate of $1.40, according to a Nov. 15 research note. "Europe's fiscal troubles are set to continue and the U.S. economy is starting to revive," wrote analysts led by Mansoor Mohi-uddin, the bank's chief currency strategist. "We expect investors to look more favorably on the dollar now."
The bottom line: While some politicians say quantitative easing will lead to declines for the dollar, the markets see stability for the U.S. currency.