The Federal Reserve is extending its efforts to push down long-term interest rates via Operation Twist. Here's why this stimulus is not bad for the dollar.
The Federal Open Market Committee has met, and Operation Twist is getting a renewal on life, with the Fed continuing its efforts to push down long-term interest rates in a bid to give the economy more juice. Stimulus measures usually hurt the dollar - see, for example, quantitative easing - but Alan Ruskin, Deutsche Bank's global head of G10 foreign exchange strategy, says you don't have to worry for long.
"An extension of Twist would be seen as solidly risk positive, and moderately USD negative in the short-term, best expressed through lightly owned long AUD and CAD positions in G10 currencies," he wrote in a note to clients. But over the medium term, Ruskin says, "the USD has nothing to fear from balance sheet neutral actions like Operation Twist."
Because Operation Twist involves the Fed selling some short term Treasurys and buying longer term, the effect on its balance sheet is basically neutral, Ruskin says. Also, if lower long term rates boost commercial lending and borrowing, that's good for the economy. On top of all that, Ruskin says, "Twist has been associated with lower long-term rates, and a flatter yield curve that is generally consistent with USD strength."
How do you trade all this? It depends on your time horizon. Ruskin expects Canadian and Australian dollar strength in the short term. But if your time horizon is longer, well, with apologies to Gordon Gekko, green is good.
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