During 2013, a year in which the Fed purchased $85 billion worth of Treasuries and mortgage-backed securities each month, the dollar, based on the US Dollar Index, rose by about 1% (see below). Many investors expected the dollar to weaken dramatically as a result of monetary easing, but so far that has not been the case.
Why has the dollar not fallen further during this period? The answer is very complex, but one of the largest drivers comes from the fact that many of the world's central banks are also engaging in monetary easing. The strength of a currency is relative, not absolute. Desire for a particular currency and the investments denominated in it are a function of the other available options. Had the US been the only country liquifying the financial system and maintaining short-term rates near zero, the story could have been much different.
Remember, as we have discussed, that QE ... Log in or subscribe to continue reading.
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