The first and most important reason is, of course, Paradigm.

The USD sells off because people believe that it should be selling off. To quickly recap their rationale, they believe that QE debases the USD because the Fed is “printing money”. Hence, in their minds, more USD supply = lower USD value.

Of course, we now know that this line of thinking is false.

But it really doesn’t matter that the vast majority of people misunderstand how QE does not work, and the implications this has, or more accurately, does not have on asset prices. It only  matters that the vast majority believes that QE works in the way the financial media and everyone else says it does.

And, because they are the majority, their actions decide what happens with asset prices.

Unfortunately for the USD (and its holders), this tends to mean a brutal sell off.

While the beginning of the sell off is sparked by traders/investors “pricing in” QE by selling USDs, it quickly devolves into panic selling as parties who once thought they held strong hands find the value of their USD longs dissipating extremely quickly.

It is important to note that not all of the Fed’s crisis policies fail to work as intended. The Fed has used USD swap programs with other global central banks in the past in order to provide USD liquidity internationally (USDs being the global reserve currency and all that).

These have existed in various forms over the years, expanding from a small number of countries who had access to them, like Japan early on, to a broader audience during the Great Financial Crisis of ‘08. 

The arrival of Covid in 2020 then saw the Fed greatly expand the roster of international central banks who could access their USD swap lines. Which is an often overlooked fact demonstrating how dependent the world is on USD liquidity.

These USD swaps, unlike QE, actually increase the supply of USDs in the global economy. This is because when a swap line is activated, the Fed lends USDs to foreign Central Banks, who in turn lend these dollars to their local banks.

As such, international banks get access to USD loans, which alleviates their need to scramble for USDs in the repo, Eurodollar, and FX markets.

However, these swap lines are only a temporary measure, meant to push USDs out into the global financial system when the Eurodollar market seizes up. They must ultimately be paid back to the Fed when the swap reaches maturity.

Of course, they can be repeatedly rolled over until USDs are easily and widely available in the open market again, which reduces the impact of global financial parties repaying the USDs they obtained from the Fed.

That being said, Paradigm is far more important than swap lines in the USD’s QE driven sell offs, simply because the Fed has engaged in QE numerous times between 2008 and 2020. On the other hand, the global financial system only tapped into the Fed’s swap lines in a big way twice, in 2008 and 2020.

Remember that the market does not care about what is right or wrong, logical or illogical. It only cares about greed and fear!