US Fed's Quantitative Easing Draws Flak

US Fed's Quantitative Easing Draws Flak

US Fed's Quantitative Easing Draws Flak

The US Fed's decision to undertake quantitative easing appears to have drawn flak from a number of nations, with the exception of the UK, which seems to have welcomed it to some extent. Having run out of options to stimulate the US economy, the US Fed unveiled a $ 600 billion quantitative easing program to buy government paper. This would induce liquidity into the economy and make more funds available. Higher liquidity would keep interest rates soft and hopefully stimulate investment and spending. This would hopefully provide the US economy with another round of stimulus and steer it towards a higher rate of growth. However, increasing liquidity also likely to impact the exchange rate of the US dollar vis--vis other key currencies as the increased supply of dollars would build up inflationary pressures and the value of the dollar would fall in the future. Sensing this, investors would unwind their holdings in dollars and the dollar would depreciate.It is the depreciation of the dollar, which is becoming a sore point for other trading partners, whose currency would effectively become stronger as compared to the dollar thereby yielding competitive advantage to the US industry as the latter's goods and services, would become cheaper due to the weaker dollar. This would lead to demand for such goods shifting away from trading partners of the US to the latter. While nations like China and Brazil have criticized the loose monetary policy stance adopted by the US economy, the British Finance Minister has welcomed the US move as he believes that it could kick start the US economy and a strong US economy is good for the world. Other nations on the other hand believe that the increased money supply in the US is likely to find its way into speculative investments in other parts of the world and could lead to speculative bubbles.The loudest protests were heard for Germany, which has been growing robustly on the back of its exports. A weaker dollar is likely to make German exports less competitive and diffuse the pace of growth that German exports have achieved recently. The German Finance Minister has actually accused the US of hypocrisy where the US has been accusing China of following a weak Yuan policy for gaining competitive advantage in exports and the US now is following the same policy by choosing to weaken the US dollar. The Germans also defended large export led foreign exchange surpluses, stating that these were the result of efficient industry, which needs to be emulated by other economies and that currency manipulations should not be used to attain similar effects.Another emerging outcome of the US quantitative program, potentially leading to a weaker US dollar is the emergence of the Yuan as a preferred currency for settling trade deals. According to analysts at HSBC Holdings, Yuan based trade settlement is likely to rise to about US $ 2 trillion in the next five years accounting for at least half of China's trade up from the 3%, which is Yuan based at present. The latest outcomes of the US decision of quantitative easing may be a pointer of the changing global economic equations in favor of China and other high growth economies in times to come.

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