The Federal Open Market Committee (FOMC), in their meeting held on March 17-18, surprised the market again by adopting an aggressive stance in order to provide an easing monetary environment to ameliorate the credit crunch and promote economic recovery. In addition to maintaining the Fed Funds rate in a range of 0.0-0.25 percent, they announced additional quantitative easing via the injection of massive liquidity into the system. This included their offer to purchase up to USD300 billion in longer-term Treasury securities, increase the size of their purchases of mortgage-backed securities to USD1.25 trillion this year, while increasing their purchases of agency debt to USD200 billion.
Over the short-term, it is likely that positive developments, especially economic stimulus efforts, measures to unlock the private credit market squeeze and steps to revitalize financial institutions' health likely to be released by the Fed and other US authorities may receive an agreeable response from markets. This may reverse the prevailing risk-averse theme in capital markets, which could in turn put downward pressure on the US Dollar. Nonetheless, there are several factors that are still far from clear to convince investors that the worst is over in the US crisis. To gauge the effectiveness of US actions, developments in US economic indicators will be closely watched. Focus will be on job data and home prices, as well as other economic indicators of the real sector. If the optimism is not supported by a clear sign of economic turnaround, the US Dollar may receive a boost from the resurgence of investors' risk-aversion.
KASIKORN RESEARCH CENTER (KResearch) holds the view that attention should be paid to both inflation outlook and expectation. This will mainly hinge on several factors, e.g., the amount of liquidity/money supply to be injected into the system via the increase in the size of the Federal Reserve's balance sheet as well as price movements of oil and commodities in the global market. The inflation trend may hamper the Fed from using their balance sheet to support credit markets and foster economic growth. If the Fed is in dilemma toward further liquidity injections into the system, they may pursue a quantitative easing policy only when inflation is seen low enough. But, they may have to step back from their ultra-easing stance as soon as inflationary risk increases significantly.
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