What are the Prospects of $600 bn Injected in US Economy?

07 November 12:02 PM

It has already been reported that recently the US Federal Reserve (FED) made a decision to additionally stimulate economic growth by buying back treasury bills worth $600 bn. within the eight months to come.
The US Central Bank has plans to make monthly injections of $75 bn. until Q2 2011. This may push the dollar a little down according to expert forecasts.

These concerns were proven right away: the dollar went down in the foreign exchange markets on the day following publication of the FED's  statement - by 1.7% against the euro and 0.7% against the yen while stock markets responded by index growth of between 0.3% and 3%.
 

According to Howard Friend, Analyst of the leading Forex broker - MigBank, it is difficult to forecast the euro's price as it is unclear how EU's and Japan's central banks will behave in the context of the weakening dollar. Implementation of the program involving money injections in the US economy will result in the euro/dollar rate at 1.46, but it should not be ruled out that the European Union might artificially weaken its own currency in response.

In addition, some experts expect an inflow of speculative capital as this tendency is typical of developing markets in the context of a weakening dollar. If this happens, the Ukrainian Hryvnia should first grow and then, after investors exit the market, the national currency will become weaker.

Ukrainian raw materials export-oriented producers will see a weaker dollar in a positive light as their product prices will rise. Besides, the stock market has livened up by demonstrating the largest index growth since the beginning of the fall by adding 3.75% on Thursday, 4 November. Traders forecast that growth may reach 10% to 30% by end of this year.
Nevertheless, some financial experts and analysts see no special reasons behind excessively high expectations because against the background of other developing economies Ukraine doesn't look as the most attractive investment (growing inflation, lower investment rates in fixed assets, permanent fluctuations of the currency exchange rate etc) and, in their opinion, foreign investors aren't very interested to be present in the Ukrainian market.

FED's regulatory measures can cause deflation in Europe.
* A weaker dollar against the euro will inevitably trigger deflationary processes which risk aggravating the debt crisis in European nations. This is the opinion expressed by Nobel prize economist, Robert Mandell, regarded as an ideologist of the single European currency.
* As this year put EU countries in very strict economic conditions – the threat of Greek default in spring, lower sovereign credit ratings of Spain, Portugal and Ireland, - depreciation of public and corporate investment dollar reserves can affect repayment of sovereign debt by Euro zone's entities very badly.

According to Howard Friend, however, the EU Central Bank cannot contain growth of its currency as such action contradicts the Inflation Containment Mandate. The ensuing inflation will significantly impede repayment of sovereign debt since a slump in prices will cause actual growth of debt worth.

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