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Fed to Dollar: Drop

Friday, 14 Sep 2012 | 2:29 PM ET
Sozaijiten | Datacraft | Getty Images

The Fed's dual responsibilities for employment and price stability lead to dollar-depressing policies, says this strategist.

It's not easy being a Fed official.

Unlike your counterparts at other central banks, you have two missions: price stability, of course, but also full employment. It's part two of that charge that apparently drove the Fed to announce a third, open ended round of quantitative easing.

The Fed's move may well boost employment - but it's not doing the dollar any favors. (Read More: Fed's 'QE Infinity': Four Things That Could Go Wrong)

"We are living in extraordinary times, with extraordinary Central Bank policies, that will support risk and hurt the dollar, probably on a multi-month view," says Alan Ruskin, head of G10 currency strategy at Deutsche Bank .

Ruskin argues in a note to clients that the Fed's stimulus plan is more aggressive than those of other central banks because "they have fully embraced their unique dual mandate - albeit for the first time since at least the late 1970s."

The problem for the dollar is that it's not clear how quickly quantitative easing will work. Says Ruskin, "until this policy starts to pay off and the market can begin to see stronger growth translating into higher interest rate expectations, it is hard not to come to USD negative conclusions."

How negative?

"In the FX market it seems logical enough to think of currencies priced off a world where the S&P trades at say 1500 or 1525 around the election," Ruskin says. "Betas for the year to date would suggest that a 3% move on the S&P should only be worth 1.2% on EUR versus the USD; 1.5% in higher beta currencies like Aussie and Kiwi; and, 2.5% on a high beta currency fairly liquid currency like the ZAR."

In other words, if the S&P 500 index rises about three percent, you would see a whole lot of currencies rise against the dollar, with the euro rising moderately and the most volatile, risk-sensitive currencies jumping.

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