USD - The dollar is weaker against all of its major counterparts other than the JPY a day after the Fed announced the surprising start of QE3. Despite the relative outperformance of the US economy, Bernanke and the other Fed policymakers were clearly fed up with the painfully slow pace of recovery and persistently high unemployment. Unlike the first two bouts of quantitative easing, QE3 has no set end date. Rather, the plan is for the Fed to buy up to $40B in mortgage backed securities and Treasury bonds a month. Moreover, the Fed pushed its pledge to keep interest rates exceptionally low out for an additional twelve months to the end of 2015. While the Fed's proactive stance will likely give a near-term boost to the economy in the form of improved optimism, excess liquidity, and hopefully a marginal increase in lending, the longer-term effects of the program will likely be limited. What is known is that further quantitative easing debases the dollar. Rather than covering its purchases with taxpayer money, the Fed increases the US money supply and credits banks accordingly. Investors also got a read of headline inflation this morning, with CPI registering in line with expectations up 0.6% versus last month. Retail sales also came in as anticipated at up 0.9% while industrial production unexpectedly fell 1.2% from the previous reading. Finally, U. of Michigan confidence surged higher to 79.2 from 74.3. On the news, the dollar is testing multi-month lows against nearly all of its peers as investors are encouraged to seek higher yields elsewhere. While the dollar's downside will likely prevail in the near term, the stimulative effects of QE3 and general competitiveness of the US economy will likely provide support for the dollar heading into 2013.

EUR - The euro broke above the key psychological 1.30 barrier against the USD overnight as investors turned to the second most widely used currency. With the Fed turning to the printing presses, the Eurozone's comparatively conservative policies are attracting capital inflows. Moreover, the recent easing of tensions regarding the ongoing European debt crisis is encouraging investors to reconsider the reward vs. risk of Eurozone assets. While a rebalancing of the EUR/USD exchange rate was bound to happen after the common currency's steep declines, further strengthening could reignite funding fears in the region's weaker economies. Much of the concerns of a Greek exit from the Eurozone were premised on the nation's inability to strengthen their trade position through the depreciation of their currency. That argument largely fell silent as the EUR/USD rate fell to the low 1.20's. However, with a test of the EUR's 2012 high of 1.3475 now appearing likely, Eurozone lawmakers may be growing uncomfortable with the pressure a stronger currency places on their economies. Even Germany, whose exporters have seen a sharp decline in foreign demand, is not immune to the pain of a strengthening EUR.

GBP - Sterling is also higher this morning as the Fed's new plan to purchase assets has spurred a bit of risk taking. Moreover, BoE monetary policies are looking rather calculated and conservative at this point with no further easing expected for the remainder of the year. BoE Chief Economist Spencer Deal told reporters this morning that "although the economy remains weak, I am convinced had we not undertaken those actions, we'd be in a far worse state today. The recession would be deeper, unemployment even higher."

JPY - The JPY is the sole major currency that is lower against the dollar this morning as fears of BoJ intervention and rising yields on US Treasuries are weighing on the yen. Despite the Fed's new plan to buy US assets, the yield gap between a 10-Yr Treasury and JGB has widened to 105bps as investors test the Fed's focus shifts to mortgage backed securities. The boost in confidence is also weighing on the JPY's "safe-haven" status.

Commodity Currencies - The commodity linked currencies are mostly higher this morning, extending their weekly gains as QE3 will likely provide support for raw good exports. The CAD consolidated near a 13-month high against the USD with the rising price of oil - Canada's main export - providing support. The AUD surged to a fresh seven-month high, but gains may be limited as investors suspect the RBA could cut interest rates further if the Aussie's gains don't track commodity prices.