What an extraordinary month ! After being backed into a corner by free market bond yields it cannot control the Fed had no choice but to cut rates. Rather than a polite little cut though , it slashed by half a point. Naturally the market traders were more than excited about this and instantly bid the S & P 500 back into its old topping range from months past. But as always , far more was at stake than stock market sentiment. Ahead of the Fed’s expected easing, the USDX was already on the verge of new all time lows. As the U.S. dollar is a fat paper currency that derives its value solely from international faith in Washington , it was on a precepise of a cliff . Few things will damage confidence more in any price faster than new and newer all time lows. And the dollar like any other financial instrument competes for international savings based on yield and net yield. The lower the yield of the short term American debt markets. the less attractive the U.S. dollar currency becomes. And since the actual rate of savings by the average run of the mill American / American consumer / American saver is low, our whole import based high standard of living is totally dependent on foreign investors subsidizing the current American way of life. So while the markets forced the Fed’s hand , it was still a huge shock to see it slash short term dollar yields with the currency in its most precarious state in history.
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