The Next Move in the Dollar
By Jeff Clark
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