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Experts: QE2 program to weaken dollar on world market

Business Materials 19 January 2011 14:44 (UTC +04:00)

Azerbaijan, Baku, Jan.18 / Trend, A.Badalova /

New measures by the U.S. Federal Reserve System on "quantative easing" (QE2) will weaken the position of the U.S. dollar on the world market, experts believe. However, their opinion differ on the program's necessity and efficiency.

"The policy is likely to put downward pressure on the dollar, but because of China's undervalued exchange rate, it puts pressure on the wrong currencies," Adam S. Hersh, an economist at the Center For American Progress, wrote Trend in an e-mail.

He said it is critical for the health of the U.S. Economy, as well as developing economies, to work together to encourage China to revalue its exchange rate peg.

The U.S. Federal Reserve System's program, aimed at supporting the country's economy, poses a threat to economic recovery, Hersh believes.

At a November meeting, the Fed decided to spend $600 billion to buy Treasury bonds by the end of the first half of 2011. The decision by the U.S. central bank led to wide debates on the necessity and effectiveness of the program, known as "QE2." At its last meeting on Dec. 14, the Fed's leadership reiterated its intention to continue the program for the purchase of government bonds. The Fed justifies its decision by the high unemployment rate in the country, despite some improvement in the economic situation.

It is a policy with modest effects and it comes with great medium-to-long term risks, European Center for International Political Economy Director Fredrik Erixon said.

"While quantitative easing has proven to be justified during a sharp economic downturn, like the one in 2008, it is a policy with few proven benefits in normal times, like today," Erixon wrote Trend in an e-mail.

"Regarding the Fed's purchase of $600 billion in bonds, I don't think it will have a significant boost for the U.S. economy," James Ahiakpor, a professor at California State University East Bay's Economics Department, wrote Trend in an e-mail.

"Lack of new money from the Fed is not the reason the economy is performing poorly, thus I don't see how the Fed's action will help," he said.

According to World Marketing President Gene Aldridge, the Fed policy will have some dangerous consequences - the worst of which is increased inflation in the country.

"We believe that the Fed's move may harm the economy by creating higher and uncontrollable inflation at a time when even the housing depression will continue in the United Staets for at least two years more, "Aldridge said. High prices for imported goods will also complicate the situation, he added.

"International markets will likely react to the lower value of the dollar through QE, which we cannot predict at this time," the expert stressed.

"After all, competition in international markets is extremely volatile with nations like China holding billions of dollars in their accounts," he added.

The U.S. dollar continues to lose its position compared to major currencies on the backdrop of expectations of negative data on the country's housing market.

Meanwhile, the course of the single European currency has reached $1.335-$1.339.

According to Julian Jessop, the chief international economist at the British Capital Economics, the QE2 program will not have much of an impact on the dollar.

"The policy was confirmed back in November, but the U.S. currency has since strengthened slightly on a trade-weighted basis," Jessop said.

According to Capital Economics, the U.S. currency will rise against the backdrop of the weaker recovery of the eurozone economy compared with the United States. According to the analysts, by 2012, the dollar-to-euro rate will be equated. Furthermore, in 2011, the U.S. dollar exchange rate will gradually decline from 1.25 euros in the first quarter to 1.1 euros in the fourth.

"The decision will help the economy a little but not much, as long-term interest rates are already relatively low," Jessop said.

At this stage, the further loosening of the fiscal policy is far more important for growth, inflation and the dollar, Jessop said.

At the same time, George Mason University Research Director at the Independent Institute Alex Tabarrok negatively assessed the Fed's decision to buy Treasury bonds for $600 billion, adding that the terms and amounts of the program are "wrong."

Although the direct effect of such purchases is to temporarily lower the nominal value of the dollar, increasing U.S. exports at the expense of imports, the indirect effect in stimulating the U.S. economy is likely to increase the real demand for foreign goods and services, Tabarrok said.

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