Bloomberg News

Fed Economists Say QE Prompts Dollar Drop Like Rate Cut

April 01, 2013

Federal Reserve announcements of bond buying have prompted declines in the value of the dollar similar to the reduced valuations following cuts in the main interest rate, according to San Francisco Fed researchers.

“Changes in the dollar’s value immediately following surprise policy announcements are comparable before and after the crisis,” said Reuven Glick and Sylvain Leduc in a paper released today by the San Francisco Fed. “This suggests that changes in unconventional monetary policy have affected the dollar about as much as changes in the federal funds rate did before the financial crisis.”

While the Fed isn’t mandated to target the dollar, a decline in the currency can improve the competitiveness of U.S. exports and help the central bank spur economic growth. The Fed is purchasing bonds to bring down long-term borrowing costs and reduce 7.7 percent unemployment.

Prior to 2008, the Federal Open Market Committee relied on alterations in its target interest rate to guide the economy. Glick and Leduc looked at the impact on the dollar from Fed announcements of bond buying to compare the effectiveness of asset purchases with changes in the benchmark interest rate.

“One way to measure the effectiveness of unconventional monetary policy tools is through the U.S. dollar exchange rate,” said Glick and Leduc, who are San Francisco Fed economists.

No Target

“Although the Fed does not target the exchange rate specifically, monetary policy decisions ultimately affect the dollar’s value, which can have important effects on the economy,” they said. They focused on the impact from surprise policy announcements.

The dollar has risen 3.7 percent so far this year against a basket of other currencies. The Fed is purchasing $85 billion in securities every month and has said it will continue the bond buying until the labor market improves “substantially.”

“We find that a quantitative easing surprise equivalent to a 1 percentage point decrease in federal funds rate futures leads to a 0.5 percentage point depreciation in the dollar,” they said.

To contact the reporter on this story: Joshua Zumbrun in Washington at

To contact the editor responsible for this story: Christopher Wellisz at

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