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Louis, a lot of financial pundits are suggesting the dollar is done sinking and will rise against currencies like the euro.  Do you still see the dollar declining this year?

Well it all boils down to what the Fed is going to due at its upcoming Federal Open Market Committee Meeting, FOMC, on April 29 and 30.  The Fed is really in a pickle and its upcoming FOMC meeting will be especially interesting.  As the U.S. dollar gets weaker crude oil prices seem to correspondingly rise, leaving the Fed is in a no win situation.  However, despite the fact that the Fed risks weakening the U.S. dollar further with another key interest rates cut on April 30, I expect that they will sacrifice the U.S. dollar one last time and cut the Federal Funds rate and Discount Rate 0.5% to 1.75%.  One reason that I am convinced that the Fed will cut is that short-term Treasury bill yields, based on 1-month and 3-month Treasury bill yields, remain at 0.81% and 1.26%, respectively.  As I have repeatedly said, the Fed rarely fights market rates.

I should add that if the Fed had no key interest rates cut at its upcoming FOMC meeting then the U.S. dollar would likely soar, since it would signal that the Fed cares about the U.S. dollar.  If the Fed only cut key interest rates 0.25%, then I would expect that the U.S. dollar would briefly rally, but then subsequently settle down.  Finally, if the Fed cuts 0.5% as I expect, then the U.S. dollar will likely stumble but then soon firm up on the widespread expectations that this would be the Fed’s last key interest rates cut.

By the way, if you told me that the euro is headed to $1.75 relative to the U.S. dollar, then I would tell you that the price of a barrel of light, sweet crude oil would likely be $130 per barrel.  The Fed’s conundrum is that the more they cut key interest rates, the more they weaken the U.S. dollar and accelerate the commodity inflation that has enveloped the world.  Literally, 88% of the world’s commodities are traded in U.S. currency, so as the dollar weakens, the prices of commodities naturally rise.  The net result is the stagflation (i.e., low growth plus inflation that erodes purchasing power and consumer confidence), just like we had back in the 1970s.

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