The big news last week was that the Federal Reserve said it will continue to keep short-term interest rates low with its quantitative easing strategy of buying Treasuries with maturities between two to ten years. This caused the U.S. dollar to resume its steady slide that began in March.
Despite a weak U.S. dollar, last week’s massive Treasury auction of two-year, five-year and seven-year notes when surprisingly well. There were plenty of bidders for the biggest weekly Treasury auction ever. In fact, during the seven-year Treasury auction on Thursday, foreign central banks accounted for more than two-thirds of the buying compared with just one-third in recent auctions.
Much of sudden buying pressure probably came from Europe since the European Central Bank said that it implemented its $622 billion emergency liquidity-boosting operation. This is what I like to call “stimulus by stealth.”
The ECB’s massive liquidity surge is very similar to the Fed’s quantitative easing. The difference is that this money is being injected into the banking system. With quantitative easing, the Fed essentially printing money to buy securities and artificially suppress market interest rates. At some point, foreign investors will turn against Treasuries. This is why I expect the dollar to continue to fall in the upcoming months.