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<\/figure>\n\n\nKeep an eye on the US dollar this week. Its action will tell us the likely direction for long-term interest rates after the Fed starts cutting short-term rates next week.<\/p>\n
You see, there are conflicting arguments about the benefits of cutting short-term rates. Some folks believe if the Fed cuts the target for the short-term Fed Funds rate \u2013 a rate over which it has direct control \u2013 long-term rates will follow suit and come down as well.<\/p>\n
A growing number of folks, including yours truly, argue that absent a Quantitative Easing program \u2013 where the Treasury prints money and gives it to the Fed to perform open-market operations \u2013 lowering the Fed Funds rate will cause long-term rates, over which the Fed has no direct control, to rise.<\/p>\n
We\u2019ll know the immediate effect for sure next Wednesday if the Fed cuts its target rate as expected.<\/p>\n
Between now and then, though, we can get a clue to the direction by watching the dollar\u2026<\/p>\n
Many factors affect the value of the dollar versus other currencies. But, the dominant factor is investors\u2019 expectations for long-term interest rates.<\/p>\n
In the currency market, money flows to where it is treated best. If currency traders expect higher long-term interest rates, they\u2019ll buy dollars and the US Dollar Index (USD) will rise.<\/p>\n
If traders expect long-term rates to fall, they\u2019ll sell dollars, and USD will decline.<\/p>\n
Here\u2019s an updated chart of the index\u2026<\/p>\n\n\n<\/figure>\n\n\n
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