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The How, What, Why Of Quantitative Easing
Adam who asks, is it correct to about stimulus like quantitative easing is positive for a currency in the short-term and negative in the long-term?
So generally speaking, quantitative easing is negative for a currency. The reason for this is because quantitative easing is increasing the supply of that currency. And if you’re increasing its supply, then you are decreasing its value.
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A good example to show the influence of quantitative easing is just with the dollar index, because we’ve seen multiple QE programs from the Fed over years. And you can see on the chart we have simply mapped out it’s QE one, QE two and QE three programs. So we can see starting off with QE one following its announcement. That the dollar index did then go on to, over the following months, did go on to weaken.
When QE one came to an end, we saw a bit of strength go through the dollar. We then had some hints from the Fed, that they were beginning QE two. And then we actually had the start of QE two. We can see for that period, the Dollar Index, once again, initially declined. And then we saw a bit of a recovery into the end of QE two.
Then we had the beginning of QE three, but you’ll notice then what we actually see is we saw the fed back in December, no. Back in December 2013, announced that they were going to begin tapering their QE programs. And you’ll notice that from that point on, we actually saw quite a bit of strength go through the dollar index.
So this strength was in part because the Fed were beginning to taper QE, but at the same time, we also had growing speculation and the eventually announcement in March 2015, that the ECB would be introducing quantitative easing. So what we had is we had the Fed concluding there QE programs. And we had the ECB, just beginning to begin their QE programs. And you’ll notice we saw very similar moves in the euro dollar.
Just from early 2014, when we started to see speculation, and then eventually to the implementation of quantitative easing in March. So of course, we know that market prices springs in in advance depending on expectations. So this weakness in euro dollar was largely a result of our expectation for the ECB to implement QE, and it was coincidentally at the same time when the Fed were beginning to conclude and taper their QE programs.
So hopefully that gives you a bit of an insight into the effect of quantitative easing on currencies. Any further questions, feel free ask.