EUR/USD September 23rd, 2007

Last week the Fed cut this key rate by 50 basis points. The cut had been expected and a number of currencies, including the Euro, had already started moving up in anticipation of the cut. But after the rate cut the move in the Euro and other currencies became extraordinary. By Friday the Euro had traded over $1.41, the Canadian Dollar reached par with the US Dollar and other currencies had also made new highs not seen in years.

To get an idea what the US Dollar will do in the future we need to watch what happens with European interest rates. The French are already calling for a cut in the rates set by the European Central Bank, all in an effort to make European goods competitive with American made goods.

If the European Central Bank cuts rates then that will be the sign that the Euro, among other currencies, will continue to engage in the reckless 'beggar thy neighbor' policy (such a policy attempts to remedy an economic problem in one country by means which tend to worsen the problems of other countries.) which in turn will devalue all the World's major currencies and lead to global inflation on a grand scale.

If, on the other hand, the European Central Bank holds rates steady, or better yet raises them, then it will be a sign of fiscal and monetary responsibility. The World's currencies will survive but it is also most likely the Dollar will not. The Dollar will probably be 'thrown under the bus'. This means that Oil and Gold will no longer be priced in terms of US Dollars. The Dollar will float and it will be anybody's guess on how far down it will go. The next few weeks could be very crucial.