US dollar index falls below 84 as Fed ramps up printing press

The rally that pushed the dollar to the highest levels since 2006 is in danger of crumbling as the Federal Reserve starts buying Treasuries and ramps up its purchases of mortgage debt, adding to a flood of greenbacks. Fed policy makers said they plan to buy up to $300 billion of U.S. government bonds and step up purchases of mortgage bonds, expanding the central bank's balance sheet by as much as $1.15 trillion. The extra supply of dollars threatens to overwhelm investors just as the budget deficit swells.

The US Dollar Index tumbled 2.7% to 84.595, its biggest one-day drop since 1971. Fed policy makers have committed to buy or lend against everything from corporate debt, mortgages and consumer loans to government bonds as they try to end the seizure in credit markets.

- Well, this is it. This is what the contrarian community has been waiting for - the first move by the Federal Reserve to begin direct monetization of US Treasury debt via the printing press once it became clear that the usual players are not going to buy it up any more. So much for Hillary Clinton begging China to buy their debt. Of all possible times, Ben "Printing Press" Bernanke has to choose right now to begin to live up to his nickname.

The markets reacted immediately and violently to the pronouncement. The forex market went absolutely bonkers as the EUR/USD rate jumped from 1.30 where it had been hovering to 1.34, 1.35 and now 1.36 at the point of writing. Crude oil prices jumped from the $47-48 consolidation level and quickly breached the $50 resistance level almost like it wasn't there. Gold prices jumped from below $900 to over $950, skipping two resistance levels in one bound. Gold took out the $950 level like oil took out $50, resistance levels providing not much of a resistance at all.

The unspoken fear has now been brought out into the open, that the US will threaten to drag the rest of the world into a state of Zimbabwe-like hyperinflation. The only question now is whether the Federal Reserve is willing to carry out this threat to its logical conclusion as the bond markets rebel and "hit the bids". It will be a terrifying race between collapsing bond and derivatives markets and the Fed's electronic printing press. Either way, it is almost a foregone conclusion that the world's financial system will never be quite the same again after the smoke clears.

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