Federal Reserve: Operation Twist Set to Go Forward

Investors around the world saw the rise of the euro against the dollar yesterday. Part of the rise surrounded speculation about potential United States Federal Reserve measures. After announcements of further stimulus measures, the euro is expected to rise even further.

Operation Twist Goes Forward

After a two-day meeting in Washington, the Federal Reserve chose to extend Operation Twist. Dismal forecasts and reports in the United States pushed the Federal Open Market Committee to maintain low interest rates. Initial improvements during the first quarter have fallen at the wayside while the Eurozone debt crisis has frightened away investments in Europe and the United States. In response to the weak economy, the Federal Reserve is planning on buying long-term bonds and selling short-term bonds.

The Federal Reserve managed to stop just short of more aggressive policy measures like expanding the balance sheet at the central bank. Instead, the Federal Reserve is continuing Operation Twist until at least the end of 2012.  These measures will not increase the Federal Reserve’s balance sheets and is intended to aid the flailing economy.

The Fed outlined their plan to help out the economy today. They plan on buying up securities that range from 6 to 30 years in maturity and sell of maturities of 3 years or less. Until United States presidential elections are over this year, the Federal Reserve will be the only institution in the US capable of stimulating the economy.

Eurozone Set to Lower Borrowing Costs?

Rumors are pervading the marketplace about potential assistance from the Eurozone to the governments of Spain and Italy. Analysts expect that policymakers in the European Union are prepared to lower borrowing costs for the embittered governments of Spain and Italy. In response, the euro rose 0.1 percent yesterday to end at $1.2700. This rate is extremely close to the one-month high that was reached on Monday of $1.2748. 

The euro has enjoyed a sustained rise this week because of speculation over the Federal Reserve Bank. As this speculation dies down, analysts expect the euro to fall to lower rates. German economic indicators are weaker than expected and Spanish bond yields have reached Eurozone era highs. For a long term investment, the euro is not the safest bet at the moment.

The Greenback Drops

Amid expectations of future quantitative easing, the dollar dropped against a basket of other currencies to 81.358. This puts the dollar close to the one-month low it reached on Tuesday of 81.186. As the dollar weakens, the sterling has managed to rise to one month highs. Sterling is currently trading at $1.5725 despite rumors of new rounds of monetary easing within the United Kingdom.

The Bank of England foresees the sterling strengthening in coming months. As the United Kingdom works to protect their currency from European debt crises, the sterling could grow as investors in Europe seek a safe-haven.

G20 Possibilities

After Spanish bonds hit a record high, Italy placed a new idea at the G20 summit. The proposal asked for the Eurozone to use rescue funds to purchase the debts of economically troubled countries in Europe. Although the proposal was given at the G20 summit, it is expected to be further debated at a meeting on Friday of European leaders. Analysts expect that it will be difficult to get Germany behind the new plan. As the economic powerhouse of Europe, Germany would have to be supportive of any debt buyback plan for the proposal to be a success.

If the proposal is expected, the euro will most likely fluctuate back and forth. Considering the implications of the proposal, analysts do not believe that the euro will see a continued rise.

Other Currencies

The yen remained flat against the American greenback and the euro. The dollar reached 78.95 yen while the euro stayed relatively neutral at 100.15 yen. Over in Australia, the Australian dollar hit $1.0207 against the United States dollar. This marks a six-week high for the Australian dollar and was driven by speculation about Federal Reserve actions.

Over in Hong Kong, government officials are debating the possibility of no longer pegging it to the United States dollar. For the last 30 years, Hong Kong has chosen to peg their currency at HK$7.8 per United States dollar. Although this peg has helped Hong Kong stay afloat during the Asian financial crisis and SARS outbreak, officials are debating the wisdom of pegging it against the Chinese yuan instead.