New Fed Strategy Should Weaken the U.S. Dollar

The U.S. Dollar is trading weaker ahead of the FOMC meeting today. Traders know the Fed has to figure out a way to get more cash into circulation.

The U.S. Dollar is trading weaker ahead of the FOMC meeting today. Traders know the Fed has to figure out a way to get more cash into circulation. One tool that is being considered is using its own balance sheet as a weapon. This action would include continuing to buy its own financial instruments. Traders are anticipating the Fed to be more aggressive in the Treasury market over the near term and are selling Dollars ahead of the FOMC announcement.

 
It is clear the Fed wants to channel more money to businesses and consumers. This means it can reduce rates all the way down to zero or pump more money into the system by purchasing Treasury debt. The key to success is the Fed must clearly communicate its intentions to manipulate the money supply. There has to be a consensus amongst Fed members as too what the Fed is going to do and how they are going to implement this strategy. It is too easy for Bernanke to say one thing and another Fed member to say something else. It is ok for some Fed members to have different points of view, but when it comes to implementing the next strategy, there must be a consensus. 
 
Manipulating the money supply can be a very powerful tool, but it must be done with precision or inflation could come back. The main reason for the Fed to start using one of its most powerful emergency tools is to reduce credit spreads and improve the flow of funds into the financial markets. They will do this by pushing down yields to stimulate spending. Their mission will only be accomplished if there is clarity, conviction and consensus.
 
As the Fed continues to contemplate new ways to stimulate the U.S. economy, continue to look for the Dollar to weaken. No matter what weapon they choose to implement, the Dollar is going to be bearish. It’s a simple case of too much supply. Talk that the ECB may be contemplating stalling its effort to reduce rates will only make the Euro a more attractive investment because of the increase in the yield spread of Bunds over Bonds.