FX Impact: QE3 Spawns Dollar Weakness

September 17, 2012

When the widely anticipated move by the Federal Reserve to launch a third round of quantitative easing became reality last week, the dollar weakened across the board—adding to returns for U.S. investors, as the sea of green ink on our weekly "Currency Impact Report" makes amply clear.

IndexUniverse ETF Analyst Ugo Egbunike stressed in his weekly chat with IndexUniverse.com Managing Editor Olly Ludwig that last week's dollar weakness was particular pronounced in Europe. That was because of euro strength related to the line in the sand the ECB drew two weeks ago, signaling at long last that it won't let the eurozone go down the drain.


Ludwig: Looking at the sea of green in the table, it sure looks like the effect of QE3 is a ubiquitous weakening of the dollar, no?

Egbunike: It's definitely dollar weakness, and QE3 started that off in the middle of the week. You see that for U.S. investors investing around the world. Europe especially is the source of the biggest gains. You can see that the euro impacted U.S. investors with the biggest gains—2 to 3 percentage points in gains in returns across the board. For example, local investors in France saw gains of 1.84 percent, whereas U.S. investors in France saw returns of 4.5 percent.

Ludwig: And why would the weakening of the dollar be more pronounced in the eurozone than elsewhere?

Egbunike: I think what you see in the eurozone is partly euro strength—not as much as the dollar weakness related to QE3 itself—but there's some assurance from the ECB that the euro isn't going to go completely down the drain. So, there's some correction there.

Ludwig: So, that's a macro stability dynamic going on there, versus the QE3-related dollar weakness?

Egbunike: Exactly.

Ludwig: Now, there are some red-ink spots showing dollar strength in Egypt, South Africa and Japan. Can you put those into context for me?

Egbunike: With the yen, what you're seeing is just a slight correction, especially after the yen saw such gains as a flight to quality currency during the eurozone crisis. That's not to say the crisis is over, but there is a sort of risk-on play now going on, so there's going to be a little bit of yen weakness along with that.

As for Egypt, its currency weakness isn't that significant; it's more sort of a weekly fluctuation.

With the South Africa rand, what we're seeing is political and fundamental concern with the platinum miners. But I would expect to see more of a risk-on play in the coming weeks.

Ludwig: A risk-on play in a broad sense?

Egbunike: Yes, but also specifically affecting the rand—just looking at the general commodities markets and the gains you'd expect to see there after quantitative easing. That will definitely translate into more gains for the rand.

Ludwig: So you expect to see more green ink and dollar weakness in the coming weeks?

Egbunike: Definitely; I expect to see a lot of green ink in the coming weeks in connection with inflows into commodity currencies.



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