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Dollar drops on Fed rate cut

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Tess Vigeland: Perhaps the only thing falling fast enough in the last 24 hours to catch the price of a barrel of oil was the dollar. After the Fed’s surprise rate cut announcement yesterday, the dollar dropped dramatically against key foreign currencies. It now stands at a 13-year low against the yen, and it’s back to October lows against the euro. Marketplace’s Jeremy Hobson has that story, from New York.

Jeremy Hobson: The financial crisis sent investors fleeing to the safety of the dollar — a currency that is still the most accepted note in international business. But now that the Fed has exhausted its rate cutting option, the most likely route on the road to economic recovery is quantitative easing — basically flooding the market with dollars. And that isn’t good for the value of the greenback.

Howard Wheeldon: I think it’s very simply about yield. Unless there is a yield on a currency, there’s no point in holding it. And the dollar’s yield has virtually disappeared.

Howard Wheeldon is a senior strategist at BGC Partners in London. As for the dollar’s big drop against the euro since yesterday, he says:

Wheeldon: The sustainability of borrowing in most euro countries is seen as quite acceptable compared to that of the U.S. and indeed the U.K.

Fast rising debt in the U.K. is keeping the British pound low after falling from $2 to a $1.50 since August. Meanwhile, Japan’s trade surplus is making the yen more attractive to nervous investors, says Brian Dolan, chief currency strategist for Gain Capital.

Brian Dolan: The other major element to keep in mind is Japanese exporters. They’re basically chasing a moving target where they need to buy yen and sell dollars. And the further the dollar declines, the more intense their selling interest becomes.

But currency experts warn the boost in the yen and the euro may be temporary. They say while a weakening of the dollar is an ugly side effect, the U.S. economy may well be the first to rebound from the global slump because of the Fed’s current efforts.

In New York, I’m Jeremy Hobson for Marketplace.

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