The Fed cut rates to 2% from 2.25% y'day and the spin from the media was that this is it for rate cuts. The futures mkt is predicting a rate rise by the end of the year-15%, while 13% indicate one more cut by yr end. Makes no difference as the shadow financial system has disconnected from the official rates. The Fed is trying to regain control of the system-first by eliminating Bear Stearns and then by legislating broader powers.
The USD failed y'day to rally, but the overnight crowd got the call and has pushed the USDX up .36 to 72.94. I fully expect a rally in the USD to 75 to 76, before the bear trend reserts itself. What is likely to happen now is that other central banks will be pressured to cut their interest rates as the local economies stall. US real rates are negative-helps the borrowers and punishes the savers-funny how the US gov't is going to need to borrow 400+bln this FY. Also interesting how it is an election yr. Negative real rates lead to consumption as saving is punished, unfortunately the borrowing capacity of the US consumer is stretched to say the least. The Fed has to be aware that the US mkt may become the carry mkt of choice for the shadow banking system-hedge funds borrow in USD and then sell the USD to buy assets in other currencies and mkts.
Gold and oil are unlikely to break higher in this scenario, but oil and gold companies may benefit as they have been handicapped by the rising domestic currencies. Brazil and Canada are the prime examples. Lately the C$ has retreated, but the Brazilian Real has rocketed higher, especially after SP upgraded the local debt to investment grade.
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