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Thursday March 19, 2009 - 13:18:21 GMT
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FX Blog - What is Quantitative Easing?
As posted on www.global-view.com
Given the way the Fed's decision to initiate quantitative easing has rocked the forex market, we felt it would be useful to give an explanation of this action and its implications.
GVI Forex Jay 10:31 GMT March 19, 2009
If I can add to the discussion:
The reality of quantitative easing is the central bank prints money to buy securities for the reasons John just explained. This is why a currency weakens as the central bank increases supply of the currency and pushes down interest rates (in the Fed's case, it announced it will be buying $300 bln of 2-10 year Treasuries over the next 6 months and $750 bln mortgage backed securities). The BOE, SNB and BOJ have undertaken similar measures lately.
The reason the dollar got slammed was that market expectations prior to the FOMC decision were that the Fed would not announce the buying of Treasuries and would hold off on that decision. The surprise was in the timing and not the actual decision as the Fed had indicated this would be coming at some time.
GVI Forex john 10:27 GMT March 19, 2009
Simply put, instead of targeting an interest rate, QE means a central bank is targeting bank reserves, or the amount of money available for banks to lend. In the current situation, most central banks have been "force feeding" reserves into the banking system to get banks to lend without regard to the central bank's interest rate target.
In the vernacular of the market, central banks are "printing money". Increase supply and the price should fall.
GVI Forex john 10:22 GMT March 19, 2009
from the GV trading Handbook
By: GVI Forex
The Bank of Japan (hereinafter referred to as the Bank) determined to undertake the so-called "quantitative easing policy" in March 2001, in which current account balances at the Bank were adopted as the Bank's main operating target. Since the start of the quantitative easing policy, the Bank has raised the target level of current account balances several times. As the target level has far exceeded the level of required reserves, the adoption of the quantitative easing policy means that the Bank has had to provide additional funds to financial institutions that do not have incentives to hold a large amount of excess reserves. Such a policy has been unprecedented for any central bank. Thus, the achievement of the target has been a great challenge to the Bank. Under this policy, the Bank has taken various measures to achieve the target, facing occasional difficulties.
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