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Tuesday, November 2, 2010

Impact of Quantitative Easing 2 by US

Palsm are jittery because of the coming QE2 - Quantitative Easing 2 by the US government.

What sort of impact will 500bil USD have on the world economy, and especially your stocks and portfolio?

Firstly, we read about "priniting money" and that could mean an easing and reduction in value and exchange rate for the USD dollar AND those currencies that are pegged to it. Such as the Hong Kong Dollar. In a way, this will flood "money" into the market, and a case of money seeking money, will make stock prices increase, at least in those economies. Secondly, it may also increase the stock values of other economies. Why? The USD is deemed to be heading south, so to safeguard the value, fund managers will be seeking higher yield currencies such as the Australian Dollar. Forecasted to be on parity with USD.

This in turn would mean mining stocks in Australia will get another boost. First from the demands of mining commodities, then now with this new money.

Now it is best time to plan ahead. What are the possible impact on your current investments. If you hold US stocks, their price could rise, even though USD is coming downwards.

Another situation that is in perpetual check is foreign reserves of US currencies and debt. China being pressured to revalue the yuan is holding vast amounts of US debt. What if the pressure is too great, and the imminent downturn of USD may even push China to do what US wanted. But not just merely revaluing the currency. But firstly, to protect national interest, China will sell off all US debt, US stocks, US T-bills. Why revalue and then still holding a loss-making interest in US stocks, currency, debt? So that could happen too and I have not seen any analyst thinking of this action.

Perhaps it seems impossible. But nothing is impossible. If China just raises the yuan, China will lose double. This is perfectly logic. So be careful of what you (US) wish for!

1 comment:

  1. There could be a 20% decline in USD value over 2-4 years. Right now the money is flowing out from USA to Asian markets. Those currencies that are pegged directly to the USD will suffer a similar fate. Such as the HKD. Although HKEX shares are moving upwards, it is wise to calculate the final gains with forex erosion early and factor in the depreciation. 4 years ago, the Yuan was just below par of 1 HKD. Now it is worth 20% more.


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