Why US Interest Rates and the US Dollar Will Continue to Fall

March 26, 2008

The dead cat bounce in the US dollar that I was looking for this week did not last long. The combination of weaker US economic data and stronger Eurozone data has taken the Euro to a high of 1.5760. For those of you who had access to my economic data calls, I was looking for German IFO to beat expectations because the flash estimates of manufacturing and service sector PMI in Germany both reported improved business conditions in the month of March. If business activity was stronger, there was a slim chance that business confidence would be weaker. The market or bank analysts in particular are notoriously wrong about predicting German business confidence. They have a preconceived notion that a strong Euro, slower US growth and high interest rates will make business less optimistic. But if the numbers do not indicate that growth in Germany is slowing, then we shouldn’t assume so.

The Godfather Says Don’t Bother

French President Sarkozy said that France and the UK should join forces to pressure the US into strengthening the dollar. There is zero chance that the US will be bowing to these pressures especially without a similar call from ECB President Trichet.

At DailyFX, we call Trichet the Godfather because he never wavers on criticism or pressure from politicians and reporters. His word is generally as good as gold. This is why when Trichet said this morning that “there is no need to change the framework due to market turmoil,” Euro traders quickly shrugged off the complaints from Sarkozy.

The US needs a weaker dollar to spur growth, just as much as the Eurozone needs a stronger Euro to curb inflation.

US Data Continues to Weaken

In contrast to the stronger German IFO report and Eurozone Industrial Orders, Durable Goods in the US plummeted. The monthly decline for February was the largest on record. Even new home sales fell to a 13 year low with average prices declining from $250,800 to $244,100. The housing market is trouble which means that the Federal Reserve still has a lot of work to do.

Expect interest rates to fall below 2 percent in the next 3 months.

Posted in Bernanke, ECB, FX Radio, Fed Rate Cut, Forex News, Forex Podcast, Trichet, US Dollar, euro