The US Federal Reserve’s announcement it would buy another $600 billion in US government bonds to boost the economy will help the dollar stabilize, and no further easing is necessary; but the move might exacerbate tensions at the meeting of G20 ministers which started in South Korea on Thursday, said analysts at Japan-based investment bank Nomura.
The Federal Reserve headquarters in Washington, DC.
“It’s quite likely that this stimulus, as well as the fact that some of the data in the US is picking up slightly, means that we won’t get QE3* in 2011 so the dollar can probably stabilize now,” said Geoff Kendrick, European head of FX strategy at Nomura.
The US Treasury’s mantra for years has been that it has a strong dollar policy, Kendrick said.
In light of the G20 meeting, last week’s announcement on further bond buying is unfortunate, he said.
“The market knows, and China clearly knows, that in the lead-up to that, that caused the dollar to sell off,” Kendrick said.
The view at Nomura, which launched its new European headquarters in London on Thursday, is that almost all of the $600 billion was already priced in for the dollar.
40 Percent Chance of Success?
In a research note published last month, Nomura analysts outlined a number of positive and negative risks to the economic recovery, assigning a probability and impact rating to each one for the next six months.
“There are, to use the polite economics word, externalities to the Fed’s action which at the very least increase the political tensions around a genuine attempt to rebalance. We think on balance that this sets us up for a bigger fall than otherwise six months out,” they said in the note.
In their assessment of risks over the next six months, the Nomura analysts highlighted a G20 agreement on rebalancing currencies as one of several factors which could positively impact the global recovery over the next six months, but only assigned a 25 percent probability to such a scenario.
Other factors which could offer support include positive fiscal surprises, with a 40 percent likelihood, and a substantial drop in oil prices, with a 10 percent probability.
There was a 40 percent chance of a successful second round of monetary easing, they said.
Nomura listed a potential failure to boost growth through a second round of monetary easing as one of the key risks in the next six months, and saw a 60 percent chance of such a scenario.
Protectionism and negative corporate cash flow surprises were also among the broker’s downside risks, both with a 60 percent probability.
*QE3: a hypothetical third round of quantitative easing by the US Federal Reserve.