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Home > Currencies
Forex: Fed Cuts…and the U.S. Dollar Gains?!
Elliott Wave International discusses the importance of price action, rather than the news, to the trend in the U.S. dollar.
Question: When the U.S. Federal Reserve Bank lowers interest rates, what is the U.S. dollar supposed to do, according to the conventional economic wisdom?
That’s right, fall – because “everybody knows” that lower U.S. interest rates make dollar-denominated assets less attractive to foreign investors. That's one of the main reasons, said many analysts, why the dollar has been weakening ever since the Fed went on its latest rate-cutting streak.
So why then did the dollar gain today (March 18) after the Fed cut the rates by a hefty 0.75%? Against the euro, the USD gained almost 200 pips (or two full cents) in less than two hours Tuesday afternoon. (The dollar gained another 200 pips by mid-day on Thursday, Mar. 20 -- Ed.)
Is it because the Fed “is perhaps getting a handle on the U.S. economic problems”? (The Wall Street Journal) Sure, perhaps. But had the dollar fallen after the cut instead, you know exactly what the same analysts would be saying.
Tuesday’s “illogical” reaction by the dollar brings to mind a Market Insight comment that Elliott Wave International's Senior Currency Strategist, Jim Martens, posted for subscribers of his Currency Specialty Service two days ago, on March 17. Here’s an excerpt:
Market Insight, 3/17/2008 – Plenty of news these days. Certainly, this is the type of environment we've been looking for. Having cut rates significantly, the Fed is running out of bullets. But the Fed may not be done yet. …the expectation going into the week was that they would cut, the only argument was by how much.
For us [though] it's a matter of what we can expect from their action, not what they might do.
That's a much easier question to answer. It appears, at least to me, that a new dollar low will bring at least the decline that started last week to an end. If that new low has not been registered before the meeting Tuesday afternoon, look for the dollar to initially fall on the announcement. We'll be looking for a bottom afterwards, and a rally attempt. If, just before the announcement, the dollar is already at new lows, then we will expect the reaction to the announcement to be dollar buying.
These ideas of how the market should react to the news are based on the price patterns, and not on what the announcement will be. This is the same approach we use prior to all announcements. The news simply offers the trading environment that allows for a quick move.
Some see such an environment as a dangerous time, and that can be true. But if the [Elliott] wave pattern is clear, we can often take advantage of the reaction to the news without having to think as hard as our peers that agonize over every [economic] number. Our approach is much more direct. It doesn't ask what should happen – but is based on what actually happens. ...JJM...
Now that the Fed has used up three more of its “bullets,” many currency traders will be wondering – how will this affect the dollar? That’s a wrong question to ask. “All that matters is price. We might as well let price tell us what to do,” says Jim to his subscribers.
You can have Jim Martens' latest forex forecasts on your screen in seconds – just scroll below to learn how.
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