FED Strengthens USD While Stocks Plunge

The US Federal Reserve (FED) will start to taper its monetary easing program in the second half of 2013, and terminate the bond buying completely in the first half of 2014. That was Chairman Ben Bernanke’s message after the FED’s meeting yesterday. A termination depends, however, on continued growth, controlled inflation and achievement of the FED’s 6.5 % unemployment target. The U.S. economy is growing moderately, but the FED sees increased downturn risks due to budget cuts, which have weakened growth. The low interest rate policies will continue.

Markets reacted by sending stocks down. The Dow Jones Industrial fell 1.35 %. Nasdaq lost 1.12 %. The Asian indexes plunged on the news. The bond buying program has been the main driver behind this year’s stock rally. A termination invites uncertainty. The Asian-Pacific MSCI-index fell more than 3 %. The Japanese Nikkei was equally hard hit as were Australia, New Zealand and other Asian markets. The downturn in equity markets is most probably going to continue in Europe today.

The FED’s conclusion and Bernanke’s comments don’t come as a big surprise. Over the last few weeks there has been continuous speculation as to when tapering would start. The FED seems to be convinced that the U.S. economy is on the right track, but keeps the door open for continued stimulus policies in the worst case scenario. This “exit” from monetary easing will hardly calm nervous markets, which usually overreact to news regarded as negative.

The FED’s decision has strengthened the Dollar in relation to all currencies. THe EUR/USD has fallen from the 1.34 level to 1.326. The Yen also lost ground, and trades at 96.28 Yen to a Dollar. The USD/GDP, which has lately traded at around 1.57, plunged to 1.5448. The USD/AUD continues to fall, 0.9250 on new data confirming a slower Chinese growth. Oil prices are down. Brent crude is trading at USD 104.69 a barrel, down one-and-a-half Dollars. Gold and commodity prices continue to lose ground.