The upside of a down dollar


Squeezing Liquidity.

Last week, the Fed announced plans to unleash $600 billion into the economy by buying up long-term U.S. Treasuries over the next eight months. Its anyones guess if the rare and controversial move will do more harm than good for the U.S. and other leading economies, but some of the harshest critics say it wont do much to improve Americas jobless problem. If anything, the fresh money could worsen trade tensions as officials from China, Brazil and Germany worry a fresh flood of capital inflows could hurt their own economies.As world leaders including President Obama gather for the G-20 summit in Seoul, South Korea today, policy experts warn that protectionism is indeed a potential weapon in a so-called “currency war” — when economies simultaneously devalue their currencies in hopes of keeping exports competitive in the world market. The last time a full-on war actually broke out was during the 1930s, and what transpired was a flurry of trade barriers that ultimately reduced world trade and worsened the Great Depression. Though there haven’t been any significant barriers to trade so far, todays situation has the potential to pan out similar to the 1930s.In a way, the Feds quantitative easing strategy is in itself protectionist and has added fire to what could easily turn into a currency war. A weaker greenback shouldnt be the only reason to keep tariffs and other trade barriers low. But if anything positive could come out of a questionable economic policy move, its to leverage a weaker dollar at this point and encourage trade rather than block it. (Source: The upside of a down dollar)

It seems to be too early for everyone to start squeezing liquidity from economy.


Fed’s Clueless ?

Increasing liquidity

The Fed’s decision to buy $600 billion of government debt has drawn scathing comments from nations which contend it is generating global instability by strengthen their currencies against the dollar, inflating asset bubbles and fueling inflation in their economies. From Berlin German Finance Minister Wolfgang Schaeuble pronounced, “With all due respect, U.S. policy is clueless.” (Source: Bernanke answers Fed’s global critics – The Economic Times.)

RBI eases liquidity, Rs 8.3k-cr bonds sold in open market

Reverse title?

The Reserve Bank of India’s attempts to ease the liquidity situation in the money market saw banks trading Rs 8,350 crore worth of government bonds on Thursday in open market operations (OMOs). The OMOs were conducted for bonds worth Rs 12,000 crore. However, with the cut-off price coming in lower than estimated only about 70% of the bonds on offer were traded. Meanwhile, the money market remained fairly tight with the overnight call rate nudging 7% and the yield on the ten-year benchmark inching up to 7.98% from Wednesday’s closing of 7.95%. After the announcement of the OMOs on Tuesday, the yield on the ten-year benchmark had fallen by almost 15 basis points to 7.96%. (Source RBI eases liquidity, Rs 8.3k-cr bonds sold in open market.)

There is something I do not understand here. Falling yield means excess liquidity. And selling bonds means sucking liquidity. But title of news is just reverse. See the next post where the buying of debt by USA’s Fed is treated as releasing liquidity.