RoadWarriorFromLP

The US is rebounding and tapering off of quantitative easing. That should mean that the dollar should continue to strengthen.

Euroland austerity has been a failure, so QE may soon be in Euroland's future. That should mean a weaker euro relative to the dollar.

The sterling is a bit harder to read. I suspect that it will gain on the euro but slightly lag the dollar -- the UK is outperforming the rest of Europe (thanks to the Bank of England's use of QE), but is outperformed by the US.

The real question is what the Bank of England is doing to phase out of QE (which I haven't followed, frankly.) QE is a positive for growth but bad for currency strength.

Michael

It's a day late and a dollar short. When the US started QE, interest rates were higher so the Fed made money as interest rates fell (proceeds are turned over to the treasury) and will probably at least break as all the bonds mature.

Federal Reserve pays $77 billion to Treasury - Jan. 10, 2012

If the Euro area starts QE soon, interest rates are currently at record lows and will probably only rise as the economy recovers and probably rise further when QE is phased out causing a deficit. The current German 10 year bund is currently yielding 0.49% and the risky Italian 10 year bond is yielding 1.88% and the Spanish 10 year bond is yielding 1.72% which are both below the current US 10 year treasury bond yielding 1.94% which is near it's low. For German bunds, the yield curves are horrible much like the Japanese bonds putting a strain on their financial sectors. For banks, long term bonds have to have a significantly higher interest rate than short term bonds for the financial sector to be healthy since they borrow short term money (deposits) and lend long term money and 0.49% isn't even enough to cover processing and servicing of loans.

In the case of the Federal Reserve, they are mostly holding bonds that that were bought at par value that are yielding above current market interest rates but that is unlikely to occur when QE is phased out if the Euro area starts buying bonds now.

German Government Bonds - Bloomberg

Italy Generic Govt 10Y Yield Analysis - GBTPGR10 - Bloomberg

Spain Generic Govt 10Y Yield Analysis - GSPG10YR - Bloomberg

United States Government Bonds - Bloomberg