The dollar traded relatively flat in overnight markets but declined sharply between 07:30 EDt and 08:30 EDT. So, it's a cat and mouse game between the dealers and the traders who know that the greenback is bound to fall further, just not exactly when it will happen.
The Fed's surprise move to purchase $300 billion of longer-dated Treasurys, $750 billion purchases of mortgage-backed securities and another $200 billion in agency debt has not only raised global risk appetite but has drastically eased monetary policy and opened up inflation risks further down the road. Since commodities are priced in dollars, any weakening of the greenback will cause the price of them to increase.
Crude oil jumped $4 overnight to $52.15 per barrel and gold rose $60 to $949.50.
The size of the Fed's operation has surprised many analysts and led to some accusations of panic on the part of Fed Chairman Ben Bernanke. And although the moves are likely to be effective in raising liquidity, there still remains the question of whether it can help to boost lending and bring an end to the U.S. recession.
The reason is because no matter how much money becomes available to lend, consumers still have very high debt levels relative to income (65% 15 years ago to 100% in 2000 to 135% today), a situation that has worsened since the values on homes and 401k retirement plans has plunged. Also, with employment continuing to weaken (continuing claims rose to a record high 5,473,000 last week), and with the number of hours worked and compensation falling, banks will likely remain extremely reluctent to lend even to consumers who have jobs.
The Fed is trying to increase lending in an economy where the total debt to GDP ratio (of households, financial firms and corporations) is now 350%, an unsustainable debt dynamic. The bursting of the housing bubble showed that most of the consumer "wealth" that supported the massive leverage and overspending was a fake bubble-driven wealth built on ever-increasing housing and stock values, which were always only a paper gain and not a real gain based on selling positions. The Fed's only answer to solving this is to try and force more and more debt onto already overly debt-burdoned consumers who are losing their jobs!
Debt becomes a ponzi game whenever you persistently consume more than your income year after year whether you are household with negative savings or a government with budget deficit as you continuosly re-borrow to finance the payments on your previous loans. The Fed's answer to this debt crisis is to debase the currency and inflate its way out of the liquidity trap created by the phony accumulation of wealth built on a house of cards unrealized paper increase in assset values. Essentially, the whole world borrowed against gains in asset values which no longer exist, much the same way as executives on Wall Street were paid bonuses on paper gains which were never realized.
The Fed did get its wish as far as interest rates were concerned as it moved into a formal quantitative easing (QE) program along with the U.K. and Japan, with yields on 10 year Treasuries and 30 year mortgages falling nearly 50 basis points overnight.
The moves into QE on the part of the Fed, BoE and BoJ will put additional pressure on the ECB to adopt a similar program but so far, the ECB is resisting this move. In a speech in Paris earlier this week, ECB President Jean Claude Trichet said he would much prefer pumping emergency liquidity into European banks than adopting quantitative easing as banks, rather than capital markets, play a greater role in the euro zone than they do in the U.K. and the U.S.