Ruminations

One of the benefits of the Fed's recent decision to cut interest rates, has been a weakening of the dollar relative to other currencies(because the dollar now earns less interest, there is less of a demand for it relative to other currencies, hence it is less expensive relative to other currencies.) The weakening of the dollar (or concurrently, the strengthening of other currencies) is going to make American manufactured goods more competitive domestically relative to foreign manufactured goods, because foreign manufacturers will have to charge more dollars to earn the same amount of their own domestic currency than before. Furthermore, American exports will be more competitive because they can actually charge less in foreign currency terms for their goods and services and still receive the same dollar amounts than before. Another benefit of the weakening dollar in this environment where valuations are being muted, will be the materialization of foreign investors pouring their now stronger currencies into U.S. dollar denominated assets stateside (including real estate and stocks), helping buttress those markets. Some pain, however, will be borne by prior foreign investors who invested in U.S. dollar denominated assets at a time when the dollar was stronger, as they will cringe to see their expected returns in their domestic currency terms diminished by the reduction in the value of the dollar (large foreign holders of U.S. dollar denominated debt being a prime example of this.) All in all, this cut in interest rates should have a positive impact on the U.S. economy.