- The Washington Times - Thursday, November 4, 2010

Stocks soared from New York to Tokyo on Thursday on investor elation over the Federal Reserve’s massive cash infusion for the economy and markets, sending U.S. stock indexes to their highest levels since the 2008 financial crisis.

After pausing on Wednesday afternoon immediately after the Fed’s announcement, investors shook off any qualms over the unusual and controversial move by the central bank and waxed optimistic on the brighter outlook for the world economy.

The Dow Jones industrial average surged 220 points, or 2 percent, to 11,435, its highest point for the year, while the Standard & Poor’s 500 index of blue-chip stocks rallied by nearly 2 percent to break through technical barriers and end at 1,221.

The euphoria on Wall Street followed similar dramatic gains in Asian and European indexes overnight as global investors saw the Fed’s move as a boon for business and markets worldwide.

After announcing that it would buy $900 billion in U.S. Treasury bonds in the next six months, Fed Chairman Ben S. Bernanke said in an opinion article that the move was aimed in part at spurring a stock rally so as to increase the wealth of businesses and stock owners.

The stock gains, the Fed chairman reasoned, would spur confidence among businesses and consumers, helping to generate economic activity and growth.

“Go for growth” is the message, said John Silvia, chief economist at Wells Fargo Securities, and that means investing in stocks and commodities like oil, gold, copper and nickel that rise with growth and inflation.

Stock and commodity investors clearly got the message Thursday. Stock indexes in London, Paris, Frankfurt, Tokyo and Shanghai gained around 2 percent, while oil prices jumped 2 percent to $86.49 a barrel. Gold surged by $45.40, or 3.4 percent, to a record $1,383.10 an ounce.

But doubts continued to linger in some circles about long-term problems that could result from the Fed’s loose money policies, particularly a rise in inflation as the dollar falls in value on world markets.

“Questions have been and should be raised about the dollar as a reserve currency,” since the Fed is now deliberately encouraging a major downshift in the dollar, said Mr. Silvia.

“Will dollar be dropped?” he asked. “Probably not,” but it will be “downgraded” as a benchmark currency because of the episode, he said.

Rep. Ron Paul of Texas, a fierce Fed critic who is expected to chair a House Financial Services Committee subcommittee that oversees the Fed when Republicans take over the House in January, also expressed concerns Thursday about the Fed’s actions.

“It’s an outrage, what is happening,” he told the Reuters news agency. “I think they’re way too independent.” The Texas Republican led an unsuccessful effort to subject the Fed to sweeping congressional audits earlier this year.

While the dollar is expected to keep falling, it should stage an “orderly” decline because the Fed’s announcement has cleared up confusion about its intentions in the markets, said Aroop Chatterjee, an analyst at Barclays Capital.

He said the dollar might even reverse course and start rising against the euro and Japanese yen in coming weeks if the Fed’s program pays off and results in stronger U.S. growth while Europe and Japan continue to stagnate.

For the time being, the dollar’s drop of nearly 15 percent against other major currencies since the Fed started its latest easing campaign has been a plus for stocks. It raises earnings for American corporations that operate globally as they convert their foreign earnings back into dollars.

Jeff Kleintop, chief market strategist at LPL Financial, said the Fed’s program is a boon not only for U.S. stocks and commodities, but for the real estate sector and fast-growing emerging market countries like China and Brazil.

“Gold may be the most obvious beneficiary,” he said. “Inflation and a falling dollar tend to lift gold-investment demand as a way to preserve value.”

Emerging countries such as Brazil are big winners because their currencies are gaining against the dollar, even as the commodities they produce are skyrocketing in value, he said.

Moreover, “U.S. stimulus cash may wind up fueling emerging-market growth as U.S. companies deploy the cheap cash to fuel growth in markets with lower labor costs and stronger demand,” he said.

Even so, Brazil’s finance minister Thursday criticized the Fed for “throwing money from a helicopter” and driving down the dollar. Brazil has been fighting a steep rise in its currency against the dollar, which makes Brazilian exports more expensive and invites throngs of investors into Brazilian markets.

“We will insist that the United States modify that policy” at a meeting of the Group of 20 economic powers in South Korea next week, said Brazilian Finance Minister Guido Mantega, warning that the U.S. could set off a “currency war” as other nations seek to stay competitive with the dollar.

Still, “the near-term impacts of Operation Reflation are reasonably clear” and beneficial for world stocks, said Mr. Kleintop, even if the Fed’s move raises the potential for long-term damage to the dollar and inflation.

In the long term, “the Fed also risks … making U.S. Treasury bonds less attractive to foreign investors that we are increasingly dependent on to fund our national debt,” he said.

For the time being, finding a buyer for the deluge of bonds the Treasury must issue to finance deficits of more than $1 trillion shouldn’t be a problem, Mr. Silvia said.

“The Fed will be buying the vast majority of Treasury issuance over the next eight months,” he said, and it most likely will not be paying “true market prices.”

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