Bernanke Announces $400 Billion Twist – Dollar Rises

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The Federal Reserve announced Operation Twist at a scale of $400 billion by the end of June 2012. This means no additional dollar printing – no QE3. They also fell short from announcing more measures such as lower rates on excessive rates.

The initial reaction is a stronger dollar. EUR/USD is down but slightly rebounds. The market is still digesting. This might change later, although the probability is not very high. USD/JPY is on the rise, moving to 76.50, away from the intervention zone.

Active Twist

The new policy is a rather active twist. This means that the Fed will not only wait until short term assets mature in order to buy longer ones, but will rather be active in selling and buying.

So, this kind of twist is more dollar bearish, but it is important to note that the size of the twist is less important and that the lack of cutting interest rates on excessive cash parked at the Fed is an “inaction” that helps the dollar.

Follow up:

Here is the relevant section from the statement that details the twist:

…the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative.

So, yields of bonds up to 3 years are expected to rise, while 6 to 30 years (a wide range) are expected to fall.

Update: as the market continues digesting, the falls of EUR/USD are extended.

Hint for more action vs. dissent

The statement also included a pledge to but mortgage backed securities. This is meant to support the struggling housing sector.

The last paragraph of the statement is ambiguous:

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.

This could be interpreted as a hint towards more QE, but on the other hand, there were 3 dissenters: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser voted against this decision and preferred not making any changes.

This means that further easing will run into a wall. In addition, the relatively high level of inflation means that QE3 will stay on the back burner.

The Fed also decided to leave the interest rate unchanged and to leave the pledge of leaving rates low at least until mid 2013. This pledge was introduced in the previous meeting.

The speculation with the highest chances was “Operation Twist” which means lowering long term bond yields while letting short term yields rise, but the Fed had quite a few policy options. QE3 was low on the list.

Just before the release of this important statement, EUR/USD managed to close the gap it made when the week began. Expectations were high for a big announcement, and after nearly three days, the 100 pip gap was closed.

EUR/USD lines are 1.4030, 1.3950, 1.3838, 1.3788, 1.37, 1.3630, 1.3580, 1.3510 and 1.3440. For more on the euro, see the euro dollar forecast.

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

28 Comments

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  4. Santosh Kompalwar on

    right now EUR/USD is trading at 1.3564 level… what is your opinion? will it go further down?? any chances of rebounding to 1.39 or 1.40 level in near future?

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  11. Ray R. Tollefsen on

    USD is better now after the “Twist and shout” speach.
    Pepped the USD kick and fight again. USD will reach levels
    like 1.39. Keep short though. Many blows to come from Greece
    that will affect the EUR/USD cross. Beware of “the Dragon” you have to trade with luck on your side. Take care as there is a heavy situation to come it influences traders to take “drastic solutions” to help them sleep. SHORT and stay there for a while. And allways an eye on what the SNB does and says.

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