QE1, QE2, LTRO and QE3? – The Affects to the EUR/USA

An increase in the money supply through government intervention (i.e. quantitative easing) decreases the purchasing power of any local currency. However, When ECB pursues programmes like the “LTRO” (their version of money printing), this lowers their currency as well, although, investors in Europe send more money to the US as a result of its safe-haven status and helps boost the US dollar up (temporary).

If you look at recent EUR/USA currency charts, you can see that Euro is losing value against US Dollar since 2008. In hindsight, the European economic crisis has actually temporarily benefited the US dollar. From the height of 2008 until today the US Dollar appreciated approximately 23%.

Expect this trend to quickly revert if the US pursues annother round of quantitative easing, as stated it was high on the Bernake’s list of options from the latest Federal Reserve meeting. Although, as one can see from the graph below, QE2 did not have the same effects as QE1. QE2 did not inflence the eur/usa  as much as QE1. This is the direct result of diminishing returns, for every dosage of QE it is required to be larger and larger to have the same afffects. (Think drug addict).

Nevertheless, expect the tide of appreciation of the USA vs the Euro to end when the real debt problem in the US resurfaces. The USA is the largest debtor nation of the history of the world. Europe’s debt problem is only masking the real problems facing the US.

Post thoughts below.

 


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