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The Late Night Fed Rate Cuts With Currency Effects

The US Federal Reserve approved a late night Sunday rate cut to financial institutions that took effect immediately, which will allow banking institutions greater access to funds. The move that cut 25 basis points off the lending rate to banks that left it at 3.25 percent. As expected, this has already had a dramatic effect on the USD, which has brought the dollar to new lows against most major currencies. The Fed meets again on Tuesday of this week, and will likely cut the prime lending rate further, which again will have the USD reaching deeper lows against other currencies. As the next move by the Federal Reserve is anticipated, many currency traders have already taken positions against the dollar that will allow them to make a healthy profit on a currency that is feeling ill.

These lending rate cuts are a signal on the overall health of the economy of a country and it doesn’t bode well in the diagnosis for the US economy. These lending rate drops are expected to help spur spending to keep the American economy afloat and weather the financial storm that has turned deadly and resulted in Bear Sterns being acquired for $2 per share by JP Morgan Chase. There may be even more casualties in this industry yet to come, which has the effect of exacerbating the situation that may call for even more rate cuts throughout the year.

Although the rate cut effectively devalues the USD against the CHF, EUR, GBP and the JPY it has a positive effect in that imported goods to the US will become ever more costly while domestically produced goods and exports are that much affordable. With the dollar’s decline it will be interesting to see what the foreign central banks will do, particularly those of countries that move their lending rates in lockstep with the US, and whether they will follow this Fed’s lead. For Forex Trading you will want to pay particular attention to the Bank of England, ECB and the Bank of Japan, and see how they react to this move by US Federal Reserve. If you expect these foreign central banks will to drop their lending rates, then the USD should rise against their respective currencies. So if you don’t yet participate in Currency Trading then now is the time to Forex Brokers and jump in to make some money whether it be with Managed Forex Accounts or make the trading decisions yourself.