Friday, September 24, 2010

Mackenzie: Bond markets vs QE2

Stopping the current disinflation trend and preventing deflation could entail a lot of bond purchases under QE2. In turn, there is the real risk of a substantial weakening in the world’s reserve currency, accompanied by a surge in dollar-denominated commodity prices. A weaker dollar should boost exports and will foster import price inflation for the US economy. That’s at odds with other central banks such as the Bank of Japan and those of emerging market countries, which want competitive currencies versus the dollar...

This places investors in a bind as it’s not wise to fight the Fed and central banks when they want something. But, mindful of the lessons from the mortgage bubble bursting in 2007, investors at some point will probably need to run for the exit from QE2, and fast.

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