Fears of runaway inflation battered the U.S. dollar after the Federal Reserve's announced quantitative easing measures on Wednesday, but market watchers say it's far too soon to expect protracted U.S. dollar weakness.

Quantitative easing involves printing money in order to lower lending costs through asset purchases. It is nearly universally regarded as a currency negative.

The reaction following the announcement that the Fed will by $1.15 trillion of mortgage-backed securities, agency debt and Treasury securities was unmistakable. In the 24 hours following the decision, the U.S. dollar fell six cents against the euro.

But Julian Jessop, chief international economist at Capital Economics, said the sentiment is overdone.

The negative response appears to reflect a number of worries, the simplest can be boiled down to the argument that if there are more 'dollars' around as a result of the Fed's creation of new money, then the laws of supply and demand mean that the value of the dollar must fall, he wrote in client note, but added: It is just as likely that the Fed's more aggressive policy easing will help to support the U.S. economy and financial system and continue to increase the relative attractiveness of dollar assets.

On Friday, the U.S. dollar stabilized, recovering a cent against the euro to close at 1.3548. Still, the U.S. dollar was down at least 2% against every G10 currency on the week.

Ashraf Laidi, chief currency strategist at CMC Markets, said he wants to see more evidence of U.S. dollar weakness before predicting another down leg in the long-term U.S. dollar bear market.

In the short-term, he said if the euro can rise above 1.3740 it will indicate strength, while a decline below 1.31 would signal U.S. dollar resilience.

He's also watching commodities and stocks. Laidi said a portion of the recent U.S. dollar selloff can be attributed to positive equity market sentiment and declining risk aversion. If stocks continue to rally and the U.S. dollar slumps, it doesn't necessarily signal trouble for the currency, he said.

On the other hand, if stocks tumble and risk aversion rises yet the dollar falls anyway, it would indicate huge losses.

It would be a huge signal against the dollar, he said.

One currency Laidi expects to appreciate against the greenback is the Australian dollar. The banking system in Australia is relatively sound and policymakers haven't signaled any likelihood of quantitative easing.

Still, the U.S. dollar was down at least 2% against every G10 currency on the week.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, is a long-term U.S. dollar bull and said the quantitative easing doesn't change that.

Look for the dollar's uptrend to resume in the second quarter, he said.

He notes that while inflationary concerns are legitimate, he believes the chance of deflation is greater. He cites the Japanese experience from the 1990s, where printing money following a banking crisis did not cause inflation.

Interest rates remained low. Deflation was not defeated. The currency was not debased, he said.

Others, however, are equally adamant that dollar printing will be an unambiguous negative for the greenback.

Any strength shall be transitory; shall be very short lived indeed, and will simply be an opportunity into which to sell, said Dennis Gartman, editor of The Gartman Letter.

Most recently, the Canadian dollar was up 0.0003 to 0.8069 against the U.S. dollar ( 1.2393 USD/CAD) and up 1.11 to 77.39 against the yen.

The U.S. dollar was up 1.38 to 95.91 against the yen and the Dollar Index was up 0.712 to 83.841.

The euro was down 0.0111 to 1.3555 against the U.S. dollar, down 0.0140 to 1.6798 against the Canadian dollar, down 0.0029 to 0.9390 against the pound sterling and was higher by 0.78 to 129.96 against the yen.

The pound sterling was down 0.0071 to 1.4433 against the U.S. dollar and down 0.0096 to 1.7886 against the Canadian dollar.

All data taken at 3:45 p.m. EDT.

By Adam Button, abutton@economicnews.ca, edited by Megan Ainscow, mainscow@economicnews.ca