U.S. Dollar Crushed Last Week after Fed Hints at More Economic Aid
The U.S. Dollar finished sharply lower last week after the Fed strongly hinted that it would provide more aid to prevent the economy from derailing. Foreign currency investors reacted as if the Fed had given them the green light to sell the Dollar, delivering a crushing blow to the greenback against all major currencies.
Many investors now feel based on the tone of the Federal Open Market Committee's statement that it was getting ready to rev up the Treasury printing press for another round of quantitative easing in November.
The USD JPY finished the week lower after ending last week in a position to break out to the upside. The break in the Dollar/Yen triggered a retracement of the entire "intervention rally" from over a week ago. The inability to follow-through to the upside may have served as further proof that interventions are hard to pull-off without the help of other central banks.
For several weeks prior to the intervention I had warned that Japan's first intervention in over 5 years would likely fail if the Bank of Japan was forced to go it alone. With most major central banks facing economic problems of their own, it was highly unlikely that they would buy Dollars and sell Yen just to help Japan's economy improve. In fact, after the Fed hinted hard of additional quantitative easing, some accused it of deliberately weakening the Dollar, thus reducing the impact of the BoJ's intervention.
Late in the week, the USD JPY rallied sharply higher overnight on speculation that the BoJ had intervened again. This proved to be a rumor and the Dollar/Yen resumed the down slide it had begun earlier in the week.
Without the cooperation of other central banks and facing a weakening U.S. economy, it is likely the Japanese Yen will continue to rally next week with very little chance Japanese officials can stop it from appreciating further.