Risk aversion remains high but the dollar’s rally has slowed. This is the result of the market trying to come to grips with the idea of the Fed buying assets, adding to its rapidly growing balance sheet, to influence long-term interest rates in addition to the overnight rate where its influence is most keenly felt.
Many are looking at the inflationary impact of this policy down the road as the Fed essentially cranks up the printing presses to pay for bond purchases and flood the system with reserves. This is a valid concern, but in a strong disinflationary (some would say deflationary) environment, it is like focusing on a hospital patient coming in with a traumatic head-wound and high cholesterol. The cholesterol may kill you one day, but the head-wound will kill you a lot quicker and needs to be treated first.
EUR/USD trades at 1.2650, well above session lows while Cable is about 75 pips above its 1.4805 lows. EUR/JPY trades at 117.75, weighed down by Wall Street.
