Wall Street Journal – Investors should ignore growing expectations of a third round of quantitative easing by the Federal Reserve and pile into the dollar because the U.S. economy is slowing and big trouble is brewing in the euro zone, the head of one of the world’s biggest currency hedge funds said Thursday.
John Taylor, chairman of FX Concepts LLC, said fears that so-called QE3 would translate into a weaker dollar, as it did in previous rounds, are misplaced, because the extra liquidity generated by the Fed is unlikely to be turned into loans.
“[As] it stands now, the Fed cannot actually force that money out into the economy, the banks must do it. As a result, QE3 does not mean that there will be excess dollars floating around and…[that] the dollar will weaken,” Mr. Taylor said.
If the banks don’t play ball, and the U.S. economy flirts with a return to recession, that will mean fewer exports from China and a decline in its accumulation of dollar reserves through trade.
“A decline in global reserves almost always means a strong dollar,” Mr. Taylor said, adding that he expects the dollar to extend its strengthening trend “through at least the last few months.”