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What will happen with the dollar after QE2 ends? Will interest rates continue to be of very high importance to the Euro? Where is the Aussie headed? Answers to these questions and more in an interview with David Song of DailyFX.

David Song studied macroeconomic policies under a visiting scholar at the Federal Reserve Bank of St. Louis while attending the Zicklin School of Business at Baruch College, and graduated with a Bachelor of Business Administration degree majoring in finance. During his undergraduate program, David acquired a strong understanding of technical analysis from a former-president of the Market Technicians Association, and incorporates both fundamentals and technicals in his analysis. After starting at DailyFX, David authors the daily briefings for the U.S. Open as well as the Trading the News report.  

1) QE2 is coming to an end but with reinvesting of maturing assets. Will the end of June see more rises in the dollar, or does the reinvesting program mean that no significant change is expected?

As the Federal Reserve plans to conclude QE2 in June, we should see additional U.S. dollar strength emerge in the second-half of the year. In light of the recent comments by the FOMC, the committee appears to be favoring a similar approach as the European Central Bank. The Fed looks as though it will retain the expansion in its balance sheet over the coming months, but may see scope to lift the benchmark interest rate off the record-low towards the end of the year as price pressures in the world’s largest economy intensify. With QE3 off the table, the next step will certainly a gradual normalization of monetary policy.

2) Do you think that rescheduling or restructuring of debt in Greece will have a domino effect on other troubled Euro-zone nations? Or can a wise plan keep such an event contained?

European policy makers certainly have a mixed view on rescheduling/restructuring the debt for Greece, and record-high financing costs will make it difficult for the EU to combat the risk for contagion. Euro-group President Jean-Claude Juncker suggests that a ‘soft’ restructuring is on the table and ‘reprofiling’ Greece’s debt would raise the risk of a domino effect as the EU struggles to restore investor confidence. Indeed, the efforts by the EU have failed to address the root cause of the sovereign debt crisis, and the reactionary approach taken on by the group has only helped to buy more time rather than providing a solid solution to the debt crisis.

3) Prospects of rate hikes and the actual April hike boosted the Euro until recently. Are future rate hikes in the Euro-zone still a major factor as they were earlier in the year? Or, has the focus moved to the debt crisis for a long period of time?

Interest rate expectations will continue to heavily influence future price action for the Euro, but the heightening risk for contagion could lead the European Central Bank to delay its exit strategy further. After holding the benchmark interest rate at 1.25% in May, ECB President Jean-Claude Trichet softened his hawkish tone for monetary even as the majority of the Governing Council toughens its stance against inflation, and the central bank head may retain a wait-and-see approach heading into the second-half of the year as higher borrowing costs only exacerbate the sovereign debt crisis. In turn, market participants may continue scale back speculation for higher interest rates in Europe, and the single-currency remains at risk of facing additional headwinds over the near-term.

4) In Britain, the BOE raised inflation expectations, but it seems that the central bank still seems quite reluctant about raising the rates. Is a rate hike still likely in 2011?

Prospects for a rate hike by the Bank of England in 2011 certainly remain on the table as Governor Mervyn King adopts a hawkish tone for monetary policy. As price pressures in the U.K. accelerate, there is likely to be a growing shift within the Monetary Policy Committee, and Mr. King may toughen his stance against inflation as the central bank forecasts price growth to hit an annualized 5% in 2011. Although, the recent comments from Mr. King suggests that the MPC is not in a rush to normalize monetary policy this year, and the central bank appears as though it will take gradual steps to withdraw monetary stimulus as the fundamental outlook remains clouded with high uncertainty.

5) The Aussie made a sharp correction, despite strong employment and rising inflation. Do you see this fall as temporary, or will the drop in commodity prices continue weighing heavily on the Australian dollar?

There are many factors weighing on the Australian dollar, and the combination of lower commodity prices paired with the wait-and-see approach held by the Reserve Bank of Australia will continue to drag on the high-yielding currency over the near-term. At the same time, the looming end of QE2 appears to have spurred a major shift in risk sentiment, and the Aussie remains at risk of face additional selling pressures as carry interest deteriorates. The displacement in risk-taking behavior is certainly unfavorable for the Aussie, but the RBA may see scope to deliver a rate hike in the second-half of 2011 as the economic recovery in the isle-nation accelerates. In turn, interest rate expectations should help to prop up the Australian dollar, but risk trends are likely to play a greater role in driving near-term price action as currency traders scale back their appetite for yields.