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The Next Move in the Dollar

By Jeff Clark
Tuesday, September 18, 2007

Ah, memories.
 
It seems like it was just yesterday when we were turning the calendar to 2001. The Internet bubble had burst. The country was heading into a recession. And the dollar was collapsing as the Federal Reserve Board lowered interest rates to head off an economic catastrophe.
 
It wasn't much different than today. The housing bubble has burst. The country is heading into a recession. And the dollar should collapse when the Fed cuts interest rates today in an effort to head off an economic catastrophe.
 
But wait a minute. Memories, like a Sally Fields Emmy Award acceptance speech, get blotted out in spots. Only by reviewing the tape can we recall exactly what happened.
 
Just about every economic textbook on the planet claims that lowering interest rates brings down the value of a currency. The idea is that money goes to where it is treated best. And if interest rates are falling on the dollar and rising elsewhere around the globe, then investors sell dollars and buy other currencies.
 
But economic theory, much like any government-sponsored initiative on global warming, looks great on paper but fails miserably in practice.
 
The Fed started lowering interest rates in January 2001. By June of that year, the dollar was 11% higher.
 
Check out the chart...
 
As I told S&A Short Report readers yesterday, I think the interesting thing here is that the U.S. dollar started dropping one month before the Fed lowered interest rates. In other words, the market anticipated the drop in interest rates and discounted the move beforehand.
 
It looks like history is repeating itself today.
 
The dollar has fallen hard over the past month as investors are selling the currency ahead of today's FOMC announcement.
 
That, of course, begs the question... What happens when the Fed finally starts cutting rates?
 
If history is a better guide than memory, then the dollar should rally – and rally hard.
 
Best regards and good trading,
 
Jeff Clark




Recent Articles
Market Notes
Sixteen-month high: Gold breaks $725, Lihir Gold and three gold ETFs at new highs.
 
Another leg down for newspapers... New York Times, Lee Enterprises, and McClatchy hit fresh lows.
 
Oil services continue to lead the market... Weatherford, FMC Technologies, Floteck, and Cameron hit all-time highs.
 
"Toy" makers still falling... Harley-Davidson and Brunswick continue to feel the consumer spending slowdown.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%