FED Strengthens USD While Stocks Plunge

The US Federal Reserve (FED) will  start to taper its  monetary easing program in the second half of 2013 ,and terminate the  bond buying  completely in the first half of 2014. That was Chairman Ben Bernanke’s  message after FED’s meeting yesterday. A termination depends, however, on continued growth, controlled inflation and achievement of  FED’s 6.5 % unemployment target. The US economy is moderately growing, but FED see increased downturn risks due to budget cuts, which have  weakened growth. The low interest rate policies will continue.

Markets reacted by sending stocks down. Dow Jones Industrial fell 1.35 %.  Nasdaq lost 1.12 %. The Asian indexes plunged on the news.  The bond buying program has been the main driver behind this year’s stock rally. A termination invites uncertainty. The Asian-Pacific MSCI-index fell more than 3 %. The Japanese Nikkei was equally hard hit as were Australia, New Zealand and other Asian markets. The downturn in equity  markets is most probably going to continue in Europe  today.

FED’s conclusion and Bernanke’s comments don’t come as a big surprise.  Over the last few weeks there has been continuous speculation as to when tapering would start.  FED seems to be convinced that the US economy is on the right track, but keeps the door open for continued stimulus policies in the worst case scenario.  This “exit” from monetary easing shall hardly calm nervous markets which usually  overreact to news regarded as negative.  

FED’s decision has strengthened the Dollar in relation to all currencies. EUR/USD has fallen from the 1.34 level to 1.326.  Yen has also lost ground and trades at 96.28 Yen to a Dollar. GBP/USD, which lately has traded at around 1.57, plunged to 1.5448. The USD/AUD continues to fall, 0.9250, on new data confirming a slower Chinese growth. Oil prices are down.  Brent crude trades at USD 104.69 a barrel, down one-and-a-half Dollars. Gold and commodity prices continue to lose ground.

Click here to start earning money on Forex!