The US dollar decline is symptomatic of China’s investment bubble
There hasn’t actually been any "QE". You’ve simply had the promise of QE2 and some attempts within the market to front run the actual implementation of the policy. In reality, QE per se has nothing to do with the dollar move, which has two components.
One is traders and money managers and trend followers piling on thinking QE is money printing that weakens the dollar (in fact, no new net financial assets have been created). Second, the other is a flight back to euros after it got over sold during the crisis when there was a real risk it could completely vanish and was rescued by direct ECB check writing, along with highly deflationary terms and conditions imposed by the ECB on euro member nations. The euro turned north on the ECB intervention and not on US QE. It’s been going on for months, ever since the ECB began buying the debt in the secondary markets.
Additionally, on the yen, when the Chinese announced several months ago that they began to buy yen it seemed possible that purchases by it and perhaps other Asian central banks fleeing an imperilled euro and possible Fed debasement of the dollar explained this year’s strength in the yen. Japan’s second quarter flow of funds accounts suggests that the country’s savers and investors repatriated funds and used them to reduce their domestic liabilities in that quarter.
But that is unlikely to have ben the case in the third quarter. Reports regarding monthly capital flows, as well specific flows like those of Japanese retail margin accounts that may be classified as short term, show a significant recent increase in Japanese fund outflows as the yen rose to levels that ignited threats of government currency intervention. I think more recently, this has been totally a function of tape following trend speculators, and NOTHING to do with QE (which in any case has not even been initiated by the Fed).
You have probably seen the latest US trade data, which saw a huge increase in imports from (you guessed it)…China. Not a surprise to any of us who have been looking at the west coast port data.
The Asians are understandably reacting to stronger currencies and potentially destabilising capital flows as a consequence of what happened to them in 1997 (China also played a key role here, but that is less discussed – see my paper with Chris Dialynas ). But they are fighting yesterday’s battle. The Asian mercantilists are going to get killed most of all, not the US.
The US dollar decline is not because of QE but is symptomatic of China’s investment bubble. That’s the real problem here, not the greenback per se.