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Prieur Perspective: Greenback Gets Whacked

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Firing up the printing presses unsurprisingly hazardous to its health.

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The Federal Open Market Committee (FOMC) on Wednesday left the Fed funds range unchanged at 0 to 0.25%, but stunned the financial markets with an announcement that it would purchase up to $300 billion in longer-term Treasuries over the next 6 months.

Acting boldly in an attempt to get the economy breathing again, the policy board also committed to purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, as well as a further $100 billion in agency debt.

The objective of purchasing Treasuries is to orchestrate a reduction in long-term rates in the expectation that these lower rates would filter through to mortgage rates and other private-sector loans. The average 30-year fixed-rate mortgage fell to 4.98% on Thursday, down from 5.47% in early December and a high of 6.46% in mid-October (see Freddie Mac's (FRE) weekly survey).

"They're calling it 'The Rambo Fed'," said Richard Russell (Dow Theory Letters). "Bernanke is not fooling around any longer. He's playing all his cards. He's going to put a floor under housing and boost asset prices in an all-out attack on the bear market. Bernanke will in no way accept deflation. The Fed will go all out in printing Federal Reserve Notes in its massive assault on deflation. Bernanke will accept a collapsing dollar rather than a repeat of the Great Depression."

"These actions are high-quality bond-friendly and dollar-unfriendly," commented Bill Gross of Pimco (via Reuters). "To the extent that they are successful and Treasury efforts match these efforts, certain risk assets may benefit as well, although their ultimate prices will reflect the ability of government to successfully reflate."

On the announcement, the yield on the US 10-year Treasury Note recorded its sharpest fall since the Wall Street crash of 1987, the US dollar suffered its biggest weekly loss for almost 25 years, gold bullion surged by more than $80 at one stage, and oil and base metals gained handsomely.

The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com.



Stock markets initially rose strongly on the Fed's move to revive the economy, adding to the gains of the rally that commenced on March 10. Although stocks succumbed to profit-taking towards the close, indices nevertheless managed to register a second straight week of gains - the first such stretch since May 2008 in the case of the US bourses.



Elsewhere in the world stocks also performed strongly, with the MSCI World Index gaining 4.4% (YTD -14.2%) and the MSCI Emerging Markets Index ahead by 4.7% (YTD -2.5%). Returns ranged from +17.7% in the case of Romania to -5.6% for Bermuda. The Shanghai Composite Index (+7.2%) had another solid week and remains at the top of the field for the year to date with a 25.0% gain in US dollar terms. (Click here to access a complete list of global stock market movements, in local currency terms, as supplied by Emerginvest.)
No positions in stocks mentioned.
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