Market Overview

Could QE3 Destroy the American Economy?

Due to the recent economic conditions, some economic commentators have questioned the need for a QE3. Though the Fed has signaled that it planned to tighten monetary policy at the end of June, many have speculated that QE3 was inevitable.

In March, Atlanta Fed President Dennis Lockhart said that the Federal Reserve may need to consider a third round of quantitative easing. Though he admitted that the Fed would have to be “very cautious” in its decision, he said that the Fed would have to consider the option if oil prices remain high.

The Federal Reserve undertook QE2 last year amid heavy criticism in an effort to boost the struggling U.S. economy. Though the U.S. stock market has subsequently rallied, commodity prices have soared as well and unemployment remains high.

M&G's Jim Leaviss has warned that should the Fed undertake QE3, the dollar could collapse. “The Federal Reserve will not contract its balance sheet anytime soon. The dollar will collapse if we get a third round of quantitative easing, but this is not something that concerns the Fed in the slightest,” he said.

Traders believing that QE3 will eventually occur may want to consider an ETF that would play on the dollar weakness that may result. An ETF, such as PowerShares DB Dollar Bearish Index (NYSE: UDN), may do well in an environment with a weakening dollar. Also, the precious metals—which have been volatile as of late—could do well if the Fed decides to undertake QE3.

Traders might consider the SPDR Gold Trust (NYSE: GLD), which may rally should QE3 occur. The commodity currencies, such as the Canadian dollar and the Australian Dollar, may continue to do well if the Fed chooses to do another round of quantitative easing. An ETF like CurrencyShares Canadian Dollar Trust (NYSE: FXC) may be another option traders may wish to consider.

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