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The cut in Federal interest rates could be a good sign for the dollar. For years now the dollar has been declining against the Euro. However, of late it is showing signs of resurgence. Does this portent that finally dollar will achieve stability against the Euro?
All signs are indicative of the dollar strengthening against the Euro, and economists are not predicting that the danger of dollar falling precipitously against the Euro could be finally over. This is good news for FOREX traders, and they should thank Ben Bernanke, the Federal Reserve chairman for this.
The weak dollar had increased the cost of oil and other imports. American consumers were forced to spend more and there were all indications that foreign investors were dumping dollars from their portfolio starting the much-feared recession in the United States.
The trend of increasing dollar against the euro is sign of the European economy slowing down and the US economy gradually picking but. But the question is whether it can be sustained. If yes, then dollar will still rise against the euro and FOREX traders will have a field day.
The Federal Reserve cannot risk lowering the interest rates further as it will further fuel the suspicion of an American inflation, which has become an open secret. However, cut in interest rates were inevitable because the Federal Reserve did not want the dollar to fall further or encourage foreign investors to dump dollars.
The falling dollar has been helping American exports quite a bit. Because of lower-valued dollar, American goods are much cheaper overseas and in the last few months exports have increased nearly 9.5 percent compared to the same period a year ago.
However, many economists think that dollar depreciation has very little to do with interest rates. Rather it is because of $700 billion trade deficit that US currently has. According to Martin Feldstein, professor of economics at Harvard, the dollar may decline still further because the trade deficit has just reduced recently and it is still a long way from disappearing.
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