The Workings of the Fed Orchestrate the Dollar's Decline

The expectations are still too damn high. I admit that I was wrong with predicting US economic data to come out below expectations this week.

• Existing home sales (Sept MoM) greatly improved to 10% from a 7.3% decline, beating expectations of 4.1%

• Consumer Confidence increased to 50.2% from 48.6%, beating expectations of 4.5

• Durable Goods Orders higher at 3.3% from -1%, beating expectations of 2%

• Initial Jobless Claims lower at 434K from 455K, beating expectations of 455K

• GDP met expectations of 2%, up from 1.7%

Very good results, which shows that there is a slight comeback for the US. However, the dollar continued to decline despite a string of positive data. This is because the overall picture is still bleak. The expectations of a dollar rally are too high, and the fundamentals are clear that the improvements are not enough in the Fed's eye. The Federal Reserve wants more, mainly in terms in higher inflation.

On November 3rd, the FOMC is expected to announce a second round of asset purchases (QE2). The Fed language has been tough these past weeks, signaling heavy action. However, some analysts expect asset purchases to be lower at $500 billion. Seriously, that will do nothing, why waste the time. I'm comfortable with a projection of $2,000bn - $1 trillion. Now, this may be a bit much considering all of the good economic data this week - perhaps the Fed may scale down as the economy shows some signs of growth.

To stay consistent in their vision of a strong, immediate, economic recovery, the Fed will need to go all in with QE2. The Fed has clearly laid out their expectations; something we should heed well to if we want to invest properly. The inflation targets of 2-3% gradually will only be met with a falling dollar, below current levels. For the dollar to fall lower, more QE is needed. For now, just the mere expectations of increased asset purchases (heading up to November 3rd) will send the dollar lower against a basket of other currencies. If they opt for QE-lite (somewhere near $500 billion) there might be a slight rally only to be corrected with hitting comfortable lows, for the Fed that is. Either way, the dollar will fall. Gold and equities will continue to rise (more so stocks as we head into election season).