A week ago Wednesday the Federal Reserve announced its $400 billion plan — dubbed 'operation twist' — to lower long-term interests rates after its earlier pledge to keep short-term interest rates low until mid-2013. But the move did little to appease markets. (See: "Very Unusual" Fed Action Fails To Boost Animal Spirits: Dow Drops 285)
Axel Merk, president & CIO, Merk Investments, agrees with the market sentiment and calls the recent easing flat out "useless." He believes this move is a means to a greater end to be put forth by Chairman Ben Bernanke later this year.
Bernanke is really "setting the stage" for a third round of quantitative easing, says Merk. "He is just doing it much more slowly than many of us would have anticipated" in an effort to prime markets for additional money printing.
Why? Merk, who has a long record of being bullish on the euro, believes Bernanke has yet to see the dollar fall as much as he would like; the Fed chairman can still use this one key tool to devalue the dollar even more to help spur exports. In Merk's view, Bernanke will spend the next few months arguing that inflation remains low — albeit artificially low -- and that little harm would come from firing up the printing presses again.
The U.S. Dollar: Still a Safe Haven?
In the immediate aftermath of the Fed's policy announcement, the dollar actually strengthened against the euro, but that trend has reversed this week as investors have become cautiously optimistic that a solution for Greece, and the European debt crisis as a whole, may be waiting in the wings. (See: "An Ugly Process": Markets Calm Before Europe's Next Storm)
Merk believes the dollar may maintain its recent strength in the short term, but in the long term he's betting that the euro will make a comeback, because it is much more difficult for the European Central Bank to ease monetary policy and spend and print money.
"Yes the U.S. dollar continues to be a safe have, but if you look at past crises…every time there is a run to safety the U.S. dollar appears to be less of a beneficiary," says Merk. "We see this pendulum swinging and every time this pendulum swings back and forth less money sticks in the U.S."
Do you agree with Merk? Tell us what you think!
- Ben Bernanke