Currency Strategist: Global Cash Flows Can Be Relied Upon to Support the Dollar

On Thursday, the Dollar Crisis and Recovery Partners announced that the organization wonders if the Federal Reserve's recent quarter-point interest rate reduction will trigger more dollar weakness and import price inflation, which would do more harm than good.

While over the last five years the Dollar has lost 45% against the Euro, including nearly 10% in just the last year alone, and the dollar index, which tracks the performance of the Dollar against a basket of other major currencies, has declined 33%, Mike McDonald, president of the Partners, says that the trend is about to reverse, even though about 90 percent of currency traders are betting the Dollar falls even more.

"I've...never seen any financial market decline longer than five years without some significant rally, and we're five years into the dollar decline," says McDonald.

Concerning the Fed's latest action, McDonald says, "It is foreigners -- primarily Japanese and Chinese -- who buy our T-bills and support our national debt. If they don't like the lower interest rates and pull back, it means a lower dollar. We are at the point where any further dollar weakness means some big inflation."

Although it has been rising in recent times, gold lost some value in trading on Thursday as the Dollar posted gains against most other major currencies on the currency exchange.

The Dollar gained as new data revealed the highest rate of wholesale inflation in November in 34 years, leading investors to stop cease their expectations of the Fed doing any more interest rate cutting in the near future.

Lowering U.S. interest rates cause the Dollar to fall because that encourages investors to move money from Dollar-denominated assets into assets denominated in other currencies that are paying out higher yields. The Dollar has also been dragged down by the vastness of the U.S. trade deficit.

Some economists have speculated since Tuesday that the Fed only lowered its overnight lending rate by half as much as was anticipated and hoped for by investors because it does not want to see a Dollar that is too weak.

However, analysts have been cautioning Americans for some time that even now the Dollar is much stronger than it was the last time it fell precipitously, which was during the 1970s, thanks in large measure to the global economy of the 21st century where the Dollar is held in abundance by foreign central banks, especially those in Asia. What's more, a weaker dollar means American exports become more affordable and thus more attractive.

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