The cost of a dollar soared following the Fed's announcement that it plans to begin reducing its asset purchases later this year. Did you wonder what investors' search for yield and the portfolio investment inflows that search produced had to do with the peso-dollar exchange rate? What's just happened in the markets in reaction to the Fed's announcement tells the story.
Not much of all that liquidity that the Fed, the European Central Bank and, now, the Bank of Japan, have been injecting into the markets ended up where policymakers wanted -- funding loans to the private sector. Lots of the liquidity sloshing around found its way into financial investments. Equities and emerging markets offered attractive opportunities to beef up returns. Mr. Bernanke made it clear yesterday that if the US economy continues on its present course, the Fed will reduce the size of its liquidity injections later this year. That was enough to send stock prices down and the cost of currencies other than the dollar higher. It's looks like an effective way to deflate bubbles...
The peso was unusually strong in early May when it took less than $12 pesos to buy a dollar. The peso is also unusually weak at today's $13.40 fix rate. It takes some time for the ups and downs provoked by portfolio capital flows to work through, but it's a good bet that in a few months it will take fewer pesos to buy a dollar than it does today. If you can hold off purchasing dollars for a while, it's a good idea to wait.
Not much of all that liquidity that the Fed, the European Central Bank and, now, the Bank of Japan, have been injecting into the markets ended up where policymakers wanted -- funding loans to the private sector. Lots of the liquidity sloshing around found its way into financial investments. Equities and emerging markets offered attractive opportunities to beef up returns. Mr. Bernanke made it clear yesterday that if the US economy continues on its present course, the Fed will reduce the size of its liquidity injections later this year. That was enough to send stock prices down and the cost of currencies other than the dollar higher. It's looks like an effective way to deflate bubbles...
The peso was unusually strong in early May when it took less than $12 pesos to buy a dollar. The peso is also unusually weak at today's $13.40 fix rate. It takes some time for the ups and downs provoked by portfolio capital flows to work through, but it's a good bet that in a few months it will take fewer pesos to buy a dollar than it does today. If you can hold off purchasing dollars for a while, it's a good idea to wait.
