The pattern of behavior between the major developed country trade-weighted dollar index and monetary policy shows a clear pattern between the Fed QE policies and the dollar. QE1 generated a large dollar decline. The same occurred with QE2. Operation Twist and QE3, which were not as strong as the first two QE programs, saw dollar strengthening; however, levels were lower than crisis highs. The tapering in 2014 sent a signal that the quantity of money creation by the Fed would stop. The dollar strengthened further. The end of the QE programs generated a strong dollar rally which has currently stalled as global investors wait for the next Fed action. With a strong dollar rally for four years, a Fed action may not generate a further strong up trend. Nevertheless, the ongoing deleveraging of EME and hedging may still place upward pressure on the dollar.
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