LONDON (AP) - The U.S. Federal Reserve is poised to pump more dollars into the U.S. economy, casting a long shadow over imminent decisions by other big central banks wary about what the Fed's move might do to the dollar.
The European Central Bank, the Bank of England and the Bank of Japan all hold meetings this week, amid concerns the Fed's monetary injection may send the dollar down against the euro and the yen, potentially holding back exports and harming the shaky recoveries in Europe and Japan.
While Jean-Claude Trichet, head of the European Central Bank, has voiced his concern about excessively volatile exchange rate shifts, it is the Bank of Japan that is particularly worried about what the Fed might be planning. It has brought forward its policy meeting to Thursday and Friday to be able to respond quickly if the Fed's policy leads to another bout of dollar selling.
Many suspect that the Japanese monetary authorities, grappling with anemic growth levels, will intervene directly in the markets again to push down their currency's exchange rate by selling yen for dollars, should the dollar drop below 80 yen for the first time since 1995. Driving down the yen's value gives exporters a boost.
"It is possible that the BoJ will announce more stimulus measures especially after the downgrading of GDP growth forecasts for this fiscal year and next," said Neil MacKinnon, global macro strategist at VTB Capital. "The strength of the yen remains an issue for the Japanese authorities especially as the dollar is probing the 80 yen level."
Though the Bank of Japan intervened in the markets in September to stem the rise, the yen has continued to advance, hitting a fresh 15-year high on Monday, with the dollar trading as low as 80.25 yen.
The key question in the markets is how much the Fed and chairman Ben Bernanke are planning to splash out, with most analysts expecting the central bank to announce monthly asset purchases of around $100 billion a month over the next six months. The purchases are intended to boost growth because they create new money, a move that could also undermine the dollar.
Anything more than that $100 million a week figure could hurt the dollar even more. Though the prospect of more dollars in the financial system has been a boon to stocks over the last few weeks, the dollar has tanked, particularly against the yen but also to lesser extent against the euro.
Though Trichet has voiced his concerns about the dollar, the bank has shown little, if any, inclination to join the Bank of Japan in intervening in the markets.
Instead, the ECB is widely expected Thursday to continue preparing the markets to the idea that its money won't be as forthcoming as the Fed's.
While the U.S. economy has stuttered, the eurozone economy has outperformed expectations despite ongoing debt problems in a number of countries, like Greece, Ireland and Portugal. Since the height of the debt crisis in May, when Greece was bailed out by its 15 partners in the eurozone and the International Monetary Fund, Trichet has sounded an increasingly more positive tone.
Month by month he has been noting the stronger than anticipated economic recovery and supported the measures, such as the bank stress tests and new government debt rules, to prevent a repeat of the crisis that nearly drained all confidence in the euro itself.
Last month, he pointed to an ongoing decline in banks' liquidity demands as a sign of the "process of normalization" - that's a suggestion that the bank is preparing to phase out more of its crisis lending programs, possibly as soon as December.
"The ECB is likely to reaffirm its intention to follow its own path," said Frederik Durcrozet, eurozone economist at Credit Agricole. "Decisions made by the Fed, the level of the euro or comments made by some hawkish members of the board should not prevent Trichet from keeping his previous commitment to a gradual exit from non-conventional measures."
The ECB has been proactive in giving banks easy and cheap access to money when needed since the financial crisis exploded in August 2007. But it hasn't pursued measures to expand the money supply, nor has it cut interest rates as low as its peers around the world. While the ECB has reduced its main rate to 1 percent, the Fed and the Bank of Japan have cut their benchmark rates to near zero percent, while the Bank of England's base rate stands at 0.5 percent.
The worry for many is that the ECB will be too hasty in getting rid of its crisis measures, that the more hawkish members of the governing council are overly-worried about rising inflation at a time when growth could well grind to a halt as governments enact deep austerity programs to get their public finances in order at a time when the economic outlook in the U.S., and Japan for that matter, is cloudy.
The focus of Trichet's monthly press briefing Thursday could well hinge on what level the euro is trading at following the Fed's expected announcement that it is pursue a second round of so-called quantitative easing.
Up until last week, there were expectations in the markets that the Bank of England would announce further measures to stimulate the British economy.
But the news that the British economy grew by a quarterly rate of 0.8 percent in the third quarter of the year - double expectations - means rate-setters will likely put any further policy easing on the backburner.