Percentage in Point

Why Dollar Droped after the Fed’s Statement

Posted: 12 Nov 2010 06:01 AM PST

President of the Federal Reserve Bank, William Dudley made a speech last month in which he mentioned that further action is likely to be warranted unless economic activity promptly picks up.

He told that current unemployment rate is at 9.6% and inflation rate is 1.5%. These rates are purely unacceptable. That's why Fed must take action to prevent over indebted households from taking another hit and further slowing the economy. According to Dudley ,it is necessary that the economic environment would have to be friendlier to ensure that there will be more favorable trends in household balance sheets continuation.

Fed’s Quantitative Easing Step:

Dudley's speech has been taken as latest sign that Fed is moving towards another round of so-called quantitative easing. In this move, central bank buys Treasury securities from banks to push down long-term interest rates.

Potential indications from the Fed weakens the position of dollar. If that happened then the investors can only expect to earn only on assets instead of interest rates. The dollar again fallen down and its trade weighted index felt to its lowest level since January. The dollar fell to $1.37 to the euro and was under 84 yen.

Dudley haven't given any direct statement regarding inflation but warned that the declining inflation expectations meant the Fed must be so clear and resolute in its commitment to its price stability objective.

Low inflation was pointed as a threat for the first time in the Fed's statement. So it's more of concern, because the falling inflation will slow down the growth by raising the real cost of borrowing.

But on the other hand, the Fed's statement in Sept. was not as reliable as it was told that the inflation readings were too low but inflation expectations were stable.

Though there is lot of criticism on the Fed's another round. But many proponents believe that the Fed can shelter a weak economy from another shock by keeping rates low, giving household balance sheets more time to recover from the meltdown of 2008.

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