With rates already very low, one of the main policy tools left for the Fed is USD devaluation. Bernanke would never say that the objective of policy was to weaken the USD, however there is no doubt that this is one of the main channels through which the policy works.
A scan across some of the major currency and metals markets suggests that the anticipation of QE3 had been working to lower the foreign exchange value of the USD – and that the policy’s announcement has accelerated the move.
The most important cross is the EURUSD cross, and the USD has weakened against the EUR by ~8% since the 25 July low of 1.21. I would say that QE3 came into focus on 1 August, when the Fed used their post-meeting statement to tell us they were going to ease at the next meeting, however it was mixed with an ECB effect until the ECB meeting on 6 Sept. Since 6 September the USD is ~4% weaker against the EUR.
Looking at this cross only it’s hard to be sure how much of this is QE3 and how much is the ECB’s OMT plan – however the concurrent weakening of the USD against a broader variety of crosses suggests to me that at least the last 4% is due to USD devaluation.
Over the same period (6 September to now), the weakening of the USD against the JPY has been ~0.7%. This seems trivially small, however the modesty of the move is due to the fact that the Japanese are resistant to further JPY appreciation. In the context of the Japanese desire to resist further JPY appreciation, it is in the similar timing and direction that I find evidence for my ‘all about the dollar’ hypothesis.
Over the same period (6 September to present), the AUD has appreciated by ~3.5%. This is despite a sharp decline in Australian export prices, and the RBA’s increasing concern (as expressed in their September post-meeting statement) about the level of the AUD. Again, we see a sharp move lower in the value USD, at around the same time as the other moves.
The Chilean Peso, in many respects, is similar to the AUD — a small open economy that’s a major commodity exporter. The USD weakened ~2.5% against the CLP between 6 September and 14 September. Same timing, same direction…
The moves in precious metals markets are similar in timing and direction, but a little larger in scale. The value of the USD relative to Gold has declined by ~5% since 6 September.
The move has been sharper in the less liquid precious metals. The USD has fallen by ~9% relative to Platinum, and by ~7.5% relative to Silver.