Dollar Still Under Pressure

The Federal Reserve, in an unprecedented action, cut interest rates to a historic low on Tuesday in the hopes of expanding their lending and encouraging other economic boosting activities to get the American economy out of the slump it’s in. Unfortunately, it did nothing to help the severely flagging American dollar, which is still low and feeling the pressure. The dollar is so low, in fact, that some analysts are speculating on how it could actually be used in trading. Sal Guartieri, the senior economist at BMO Capital had an interesting thought on the matter. “With the funds rate now below Japan’s overnight rate, the dollar could supplant the yen as the new carry-trade currency. This likely means further declines for the greenback and a possible reprieve for commodities and resource-based currencies like the [Canadian dollar],” he said.

The dollar index closed against a trade weighted basket of six currencies at 79.232 after dropping from 79.921 earlier in the day. The dollar fell against the yen from 87.68 to 88.55 but it didn’t hit the 13 year low of 88.10 that it saw the week before.

The dollar’s fall after the Fed’s decision on Tuesday sees the currency in a very fragile state. Economists feel that the pressure, however, is less from the rate cuts and more from the Federal Reserve trying to boost its balance sheet. The statement that was released from the Federal Open Market Committee announcing the decision to cut rates stated that the Central Bank would use “all available tools to promote the resumption of sustainable growth and to preserve price stability.”

Of course the question surrounding the dollar’s liquidity has also caused speculators to start worrying about an oversupply of the currency. Stephen Gallo, the head of market analyst at Schneider Foreign Exchange commented, “The world is awash with greenbacks; they’re coming out of the woodwork, they’re growing on trees, and the markets are concerned.” The rule of thumb has traditionally been the more paper currency in circulation the lower the value.

Marco Annunziata with UniCredit MIB feels that Fed’s rate cut is only going to weaken the dollar more in the short term, being particularly vulnerable against the Euro with the European Central Bank signaling a pause in their own rate cuts in January. He states, “I still believe the harsh macro reality (in the euro zone) will eventually force the ECB’s hand, but in the meanwhile its reluctance could push [the euro] toward $1.45 by January.”