- The Fed's "buy everything" mode provides firepower to fiscal stimulus, positive for the economy.
- Guaranteeing debt makes more US assets safe, supporting the dollar.
- The Fed's shed is near empty, meaning it has nothing left to weaken the dollar.
"Throwing the kitchen sink" is what several analysts have said after the Federal Reserve announced an open-ended Quantitative Easing (QE) program – buying basically everything. The Fed's Term Asset-backed Loan Facility (TALF) has sent the dollar initially lower as it implies additional money printing.
However, are three reasons to believe the dollar has room to rise from here.
1) More fiscal stimulus
The Federal Reserve's open-ended commitment to buying US bonds allows the government to splurge cash and support the economy as it undergoes a lockdown. Higher government demand is set to strengthen the economy and is therefore positive for the dollar.
When the European Central Bank and the Bank of England announced immense QE programs last week, the euro and the pound rose respectively. This twisted logic – of seeing the currency rise when there is more of it – will likely be seen in the dollar as well.
More: Is money printing positive for currencies? Lessons from Lagarde's largesse, Bailey's bailout
2) No risk in all corporate debt
In the early days of the crisis – not that long ago – investors flocked to the safety of American debt and pushed yields lower. In turn, lower yields made the dollar less attractive and the greenback declined. Since then, the "sell-everything" mode boosted America's currency regardless of yields.
And now, investors have many more dollar-denominated assets to buy – the Fed is providing support to everything. By removing risk, investors from all over the world may stock up on corporate debt, almost of any kind. And that is dollar-positive.
3) That's (almost) all folks
The Fed has launched its "nuclear bomb," kitchen sink, and everything it has. What can exceed an open-ended commitment? The world's most powerful central bank surprised markets in the financial crisis and may do so again, but it is hard to find what else Chairman Jerome Powell and his colleagues can do to support the financial system.
The Fed already opened, expanded and enhanced its dollar swaps, cut rates to zero, and announced open-ended QE. Without additional tools to weaken the dollar, iit has nothing left to deter investors to buy dollars if they want to.
And the longer the crisis runs, the higher the demand for the greenback.
The Federal Reserve is printing dollars and that makes the currency more attractive – contrary to instincts but with good reasons behind it.
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