The dollar faces a rough time ahead. How rough, depends on the Fed.
The simple issue is this: more quantitative easing in the U.S. means lower U.S. yields and a less attractive dollar as far as international investors are concerned. Up until the last week or so, there were still some vestiges of hope that more quantitative easing, or QEII as it has been dubbed, could be avoided.
Confirmation that quantitative easing was coming to an end would have been dollar-positive, helping the U.S. currency to resume the rally that seemed to be underway at one stage this summer. But now, as more negative U.S. economic data stacks up and concern over the global recovery in general increases, QEII looks much more likely to reign.
As a result of the conjecture that the Fed will engage in QE2, we have traders watching economic reports like a hawk, plus gold bugs hedging against a falling dollar, reacting every second, pouring over economic reports.
Yet the Wall Street Journal reports the Fed is considering bond purchases:
Rather than announce massive bond purchases with a finite end, as they did in 2009 to shock the U.S. financial system back to life, Fed officials are weighing a more open-ended, smaller-scale program that they could adjust as the recovery unfolds.
The Fed hasn't yet committed to stepping up its bond purchases, and members haven't settled on an approach. After its meeting last week, the Fed's policy committee said it was "prepared" to take new steps if needed.
In the midst of that, today we have some new calculations on money velocity, due to the revised Q2 GDP report. I just casually glanced at these graphs on money velocity from the St. Louis Fed and said, holy cow, Banksters, people and corporations are just sitting on their cash.
What is money velocity? It's the rate at which money is being exchanged in the United States. Say you buy a Popsicle from Bob's small store and Bob pays Joe for cleaning the floor, Joe buys a cheeseburger from Billy Bob's Fat Shack...well, you get the idea. In mathematical terms, it is:
where is glorified GDP and is glorified money supply.
Now take a look at the latest updates on M1 and M2 velocity. You can see money just ain't movin'.
So, while hyperinflation folks freak out, the fact remains money is not moving, people are not hiring and people are not spending, I believe this bodes for more quantitative easing that many are projecting. But bottom line, it seems nothing is making money move and that's because most people don't have any. Of course the super rich have even more than before the financial crisis, but they have a tendency to sit on it. Jobs seems to be the key to all things, although lowering the value of the dollar might help with the trade deficit.
Here are the definitions of M1 and M2:
M1, the more narrowly defined measure, consists of the most liquid forms of money, namely currency and checkable deposits.
The non-M1 components of M2 are primarily household holdings of savings deposits, small time deposits, and retail money market mutual funds.