By Danica Hampton The NZD/USD surged sharply last night, from around 0.5280 to nearly 0.5450, after the Fed announced it was expanding its quantitative easing program. As widely expected, the Fed left the fed funds target range at 0-0.25%. The Fed reaffirmed its commitment to do whatever it takes to stimulate growth and backed this up by expanding its quantitative easing program. The Fed will up its purchases of agency mortgage-backed assets by US$750b, its purchases of agency debt by US$100b and will purchase US$300b worth of government bonds. The announcement elicited a dramatic reaction in markets "“ US 10-year government bond yields fell about 50bps to 2.50%. US equities surged, the S&P500 is currently up 2.60%. While the USD plunged drastically "“ EUR/USD surged from 1.3100 to above 1.3400, AUD/USD climbed from 0.6600 to above 0.6750 and NZD/USD rose from 0.5280 to nearly 0.5450. Effectively, the Fed is expanding its balance sheet by US$1,150b and investors fear the increase in US money supply will erode the purchasing power of the USD. While there fears triggered knee-jerk selling of USD last night, it must be noted that the link between whether or not quantitative easing undermines the USD is inflation. Only if quantitative easing stokes inflation will it erode the purchasing power of USDs and weigh on the USD. The speed and magnitude of the recent ascent in NZD/USD isn't sustainable "“the NZD/USD surged nearly 4% in less than an hour. As such, we suspect we'll see the NZD/USD dribble off its highs as the day unfolds. However, the global backdrop of a weaker USD and firmer global equities will likely see dips in NZD/USD limited to 0.5340-0.5350. The USD dived against most of the major currencies last night, as investors digested weak UK jobs numbers and the Fed's expansion of its quantitative easing program. GBP weakness was evident early in the night, ahead of the UK jobs data and the Bank of England minutes. The jobs data was at least as bad as investors feared. The claimant count rose 138,400 "“ the biggest monthly increase since the series began in 1971 "“ and the ILO unemployment rate rose to 6.5% from 6.3%. Meanwhile, the Bank of England minutes showed a 9-0 vote in favour of cutting interest rates to 0.50% and instigating £75b worth of quantitative easing. GBP/USD plunged from above 1.4050 to below 1.3850. Solid demand was noted for EUR/GBP, which climbed from around 0.9260 to above 0.9400, and this provided a bit of support for EUR/USD. However, as the night progressed, the GBP weakness gave way to a generally weaker USD in anticipation of the FOMC decision. As widely expected the Fed left the target range for the fed funds rate at 0-0.25% and warned that downside risks to growth and inflation meant that interest rates would remain at "exceptionally low levels" for an "extended period". More importantly, the Fed reaffirmed its commitment to employ all available tools to promote economic growth and price stability. Specifically it announced it would: ** Increase it purchases of agency mortgage-baked securities by up to US$750b (total purchases of these securities now total US%1.25t). ** Increase its purchases of agency debt by up to US$100b (to a total of US$200b) ** Purchase up to US$300b of longer-term Treasury securities over the next six months. In the wake of the Fed decision, US government bond yields dropped sharply (10-year yields fell more than 50bps from 2.94% to 2.48%), Wall Street surged higher (the S&P500 us currently up 2.4%) and the USD plunged dramatically. EUR/USD climbed from around 1.3100 to above 1.3400 and USD/JPY sank from around 98.80 to below 96.00. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.