The QE policy is done primarily to weaken the USD through the purchase of treasury securities. These bonds will shift the yield curve downwards, decreasing the yield.
We have seen that the FED has been reluctant to implement another round of QE. However, since the FOMC meeting on April 25 the yield on the 10 year bond increased by 36 bp and the S&P decreased by 4.8%. People are buying bonds as a safe haven and as a way of profiting by selling the notes to the FED if QE3 indeed happens.
The labor market data in the US has weakened. Unemployment increased, payrolls increased, jobless claims increased and retail sales were simply modest.
So any data to be released that is bad is interpreted by the market as an increase in the probability of QE. The need for QE was said by Yellen.
People are buying bonds. So, yesterday we had the weekly auction for the 10 year bond. The outcome was in line with expectations. Indeed, they sold 21 billion, with a bid/cover ratio of 3.06 and a yield of 1.62%, an increase compared to the last one when the yield reached 1.85%.
People are buying treasuries because if there is a QE they will profit from selling to the government. So, US treasuries remain a safe haven.
In Europe the situation hasn’t changed much. Today we had an auction by Italy who sold 3 year papers for 3.92% compared to 2.75% of the previous auctions.
On Sunday Spain receive a loan from the EU in the amount of 95 bn. The IMF reported that the financial system corresponds to 275% of Spain GDP.
Bottom line: QE will not help weaken the dollar primarily because the European crisis is getting worse. The only way it will weaken the USD is if the crisis is solved.Just take a look at the latest IMF report on Spain and answer if we are in a crisis or not: