November 5, 2021

US dollar is likely to rise after QE tapering announcement

 The US stock market scored gains on Tuesday. The S&P 500, Dow Jones and NASDAQ continue their rally, reaching new all-time highs every day. However, the sentiments of traders and investors may change significantly today. No, the QE tapering is not going to be a surprise - it is likely priced in the dollar rate already. However, if such a decision is announced, it will be the end of an era of monetary stimulus in the US. The Fed's policy has been in place, with brief interruptions, since the beginning of the 2008 financial crisis. The Federal Reserve is likely to announce QE tapering today, on November 3. The asset purchase program would be reduced by $15 billion a month. According to Jerome Powell, the policy will be fully ended by mid-2022.

What does it mean for stock indexes and the US dollar? The latter is likely to get additional market support. The QE tapering means cash flows into the US economy would decrease, and thus the inflation would slowly go down. In addition, the dollar should face less pressure from market players - they will have to realize that the era of "helicopter money" is over. Of course, it does not mean USD would rise against its counterparts just because the Fed finally cut asset purchases by $15 billion. The Federal Reserve has been pumping money into the economy over the past year and a half. However, if there are no new global constraints limiting growth, the US dollar may rise against the euro and the pound in the long term. In order to service its enormous national debt more easily, a cheap dollar would be more desirable to the United States. Thus, if new factors limiting the growth of USD arise, it will not be surprising.

For the US stock indexes, QE tapering would mean the end of the era of non-stop gains. Of course, major US companies would continue to expand, and investors would buy their stocks, generating growth in the long term. However, money flow into the stock market would dwindle - a correction of all major indexes and stocks is likely. Many experts anticipate the Fed's actions would cause a stock market crash, bursting a bubble that formed earlier. The announcement of QE tapering by the Federal Reserve would create downside risks for the US stock indexes.