QE2 = NZ$↑

The US Fed said it will buy an additional $600 billion in long-term Treasury securities by the end of June 2011, somewhat more than the $300 billion to $500 billion that many in the markets had expected. The Fed first signaled back in August that it was considering a second round of monetary stimulus, dubbed QE2. Ordinarily monetary policy is the tool for stimulating economic growth i.e. lower short-term interest rates. However as those rates are already near zero (0-0.25%) the Fed has had to find another route to stimulate demand. That route is to buy government bonds, which increases demand for them and raises their prices, pushing long-term interest rates down.

As a consequence of this the US$ has fallen against all leading currencies and the NZ$ = US$0.7950. The Reserve Bank can intervene under certain, strict, conditions, but is loathe to do so despite analysts predicting the New Zealand currency will go beyond 80 US cents. The strong NZ$ has a negative effect on exporters but that’s partly offset by higher commodities prices, due to the US Fed’s QE2.

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