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Friday, July 1, 2011

Weak US dollar- USA at ease while world squeeze

With the passage of QE2 (Second Quantitative Easing), demand for QE3 is rising in USA to prop up the ailing national economy.
Under QE (Quantitative Easing), which is also termed as money printing, US Federal Reserve buys bonds (and other securities) from the financial institutions by pumping money in the system.
QE2 resulted in the infusion of $ 600 billion in the system.
The money used for QE is created ‘ex-nihilo’ (out of nothing) and this results in the devaluation of dollar (as more money chases same goods and services) that means lesser goods and services can be bought with the dollar.
QE is necessary as US cant further slash the Fed rate which is already at very lower levels.
How QE helps US Economy?

QE prevents long term bonds to fall in the hands of private players and thus ensures that there is no hike in long term interest rates which relieves US economy from the fear of double dip recession.
As the US dollar devaluates, it gives fillip to the US exporters and reduces the dependence on domestic consumption, which is a requisite for the wellness of the US economy; on the other hand it reduces US’s debt burden.
Side effects of QE-How world is affected
Weakening dollar hinders productive foreign investment in USA fearing the erosion of the investment. Worldwide Speculation in commodities and currencies increases. Weak dollar shifts the investment in gold (being an alternative investment option).
Common man fears that dollar weakened by  QE3 could result in gold surpassing 2000 $/ounce level.
As dollar is used to buy crude, weaker dollar shall make oil exports dearer, and this shall set the world inflation on fire. Other countries are forced to keep their currencies low to stay export competitive which could result in currency war between nations in future.

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