Monday, 1 Nov 2010

Fears of QE2 by Fed Appear to be Diminished

The manufacturing side of the US economy continued growing in October with an Institute for Supply Management (ISM) purchasing managers' index rising to 56.9 from 54.4 in September. The US dollar sharply reversed earlier losses against the yen and the euro today, spurred on by the ISM data and by optimistic US manufacturing figures.

The more encouraging economic snapshot gave pause to the aggressive bets on expected Federal Reserve stimulus in recent weeks. The scale of any quantitative easing (QE) program may be more modest than once thought.

Investors have been betting on the possibility of the resumption of quantitative easing for the last several months. Since today's PMI reading was the last important US indicator before Wednesday's Federal Open Market Committee's (FOMC) anticipated decision on further QE, it seems likely the currency markets will now take a breather until Wednesday.