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monetary policy

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USD has been noticing a continued spike in the last week, especially so for the most traded pair EUR/USD. The rise of the USD has been a basis of conjecture for many analysts who have seen the currency being debased in the last five years and still continues to rise at an astronomical rate. In the last two years, U.S. Dollar index is up by 10% as compared to the other top currencies of the world. Read more on anyoption for details regarding the strengthening dollar and its impact on the Eurozone.

The strengthening of the US dollar in the last few days has been initiated by European Central Bank when they slashed the interest rates on June 5th. The president of ECB further informed that the interest rates will remain low for some time now. The governor of Britain, Mark Carney, also said that the British economy is too weak to fiddle with the benchmark rate of interest which was implied by the rise in long term bond yields. The other thing that supported the dollar was the 2.1% increase in the Consumer Price Index which did not hit the downward spiral despite the inflation. The increased cost of CPI has been attributed to 3.3% rise in the gasoline prices which has been the largest gain since last year.

What the experts explain is the main reason for the rise of US dollar is that it is the reserve currency of the world. The majority of nations use dollar as the currency to buy commodities such as oil which keeps propelling the US economy towards betterment. The monetary stimulus of the Federal Reserve can take the credit for keeping the dollar strong against other currencies. However, it has been speculated that when the stimulus weakens or ends, it can have strong impact on the currency.

With the dollar at an all time high, the vacations to US will be affected as it will be pricier than usual. The immediate spur of the rising dollar has been pointing towards the Federal Reserve’s purchases of the bonds that have been bought using the freshly minted currency. The quantitative easing has already augured well for the long term interest rates with yields rising to a 2.6% from the downward low of 1.6%. When the yields show an upward trend, it attracts more capital investments in America from other parts of the world which propels the dollar towards growth.

The deeper insight into the upward trend of the dollar can be seen in the overall health of the economy of America which is currently in a good shape. With housing market on recover mode, bad mortgage debts wiped out of the system and opportunistic job market with 195,000 employees added to the non-farming sector is a big boost to the economy. Despite the holistic growth, GDP has remained modest and will strengthen a bit in the coming days.  As per the IMF projections, the American Economy is expected to grow at a 2.7% rate next year. Even though this is not a classic improvement, but as compared to the other economies of Japan and Britain are not likely to do this well and with Euro zone still in the recessionary phase will keep America at the top.

The transatlantic gap in the interest rates of the both the markets are expected to rise as the monetary policies of America and Europe become clearer. With this trend, the dollar will rise further.

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The US central bank has announced it will resume its policy of pumping more money into the economy via so-called quantitative easing.

The Federal Reserve said it will buy “additional agency mortgage-backed securities at a pace of $40 billion per month”.

The central bank also said it could increase the size of its purchases if the economy does not improve.

The economy is a pivotal issue in this year’s US presidential election.

 

The US central bank has announced it will resume its policy of pumping more money into the economy via so-called quantitative easing

The US central bank has announced it will resume its policy of pumping more money into the economy via so-called quantitative easing

 

Interest rates in the US have been close to zero for several years now, and the Fed again kept them at below 0.25%.

“The committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions,” said the Fed, led by chairman Ben Bernanke.

US stocks, which had been little changed, gained after the announcement. The benchmark Dow Jones average was 0.7% higher.

The US central bank has tried to support the economy by quantitative easing – buying $2.3 trillion in bonds in two rounds.

The Fed calls such measures “asset purchases”, where the central bank buys bonds to keep the long-term cost of borrowing down. The last round of asset purchases ended last year.

Mortgage-backed securities are debt backed by loans made to homeowners.

The unemployment rate in the US has been above 8% since January 2009, but the current 8.1% is down from the recent high of 10% in October 2009.

“To support continued progress toward maximum employment and price stability, the committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens,” the Fed said.

The Fed also confirmed that its $267 billion programme to reduce long-term borrowing costs for firms and households would continue for the rest of the year.

In a move dubbed “Operation Twist”, the central bank buys longer-term bonds from retail lenders and swaps them for shorter-term bonds.

 

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