Why U.S. Dollar Will Remain Strong in the Near Term

There has been some confusion among those interested in the U.S. monetary policy and why the U.S. dollar has remained strong even as the Federal Reserve created enormous amounts of money out of thin air. Under normal conditions that would have put downward pressure on the value of the greenback.

Since economics are no longer operating under normal conditions, neither will the usual performance of the U.S. dollar; and it hasn't.

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Federal Reserve Overnight Rate Cut to 1 percent

Still trying to jumpstart the economy, the Federal Reserve cut its key interest rate by half a percentage point to 1 percent. The federal funds rate cut is on overnight loans and what banks charge one another.

This is the second time in a month the fed has cut rates by half a percentage, as the month started off at 2 percent overnight lending rates, which was cut to 1.5 percent on October 8.

Commercial banks are expected to follow suit and cut their prime lending rates by half a point as well.

According to the Fed, they are willing to cut rates this low because economic conditions seem to indicate inflation will be contained. That assumption is probably unwarranted, yet the pressure to cut rates is why this event happened, not because it's good for the long term health of the economy.

Some are asserting it's the weakness in the market which is causing the fall in commodity prices, so this cut in rates is not risky. But that's only a small part of the picture. The reality is commodity prices have plunged because of the lack of credit, and large funds having to sell their positions in order to access cash.

That, more than anything else, is the reason for the drop in commodity prices, not the underlying fundamentals.

Remember that when inflation rears its ugly head again in response to government printing more money and lowering lending rates.

This is why the commodity bull market will extend longer than thought, as this temporary credit squeeze will eventually run its course and the demand from emerging countries for commodities continue to grow.

Central Banks Around the World Cut Rates by Half a Point

A number of key central banks around the world, including the U.S. Federal Reserve, cut interest rates in hopes of quieting the enormous turmoil in the markets. In the U.S., rates were cut to 1.5 percent. Also approved by the Fed was a half point cut in the discount rate to 1.75 percent.

The banks participating in the move all cut their rates by half a percentage point. Interestingly, the Bank of Japan declined to cut rates at this time.

Other banks cutting rates were the European Central Bank, which dropped it rates from 3.75 percent from 4.25 percent. The Bank of England trimmed their rates from 5 percent to 4.5 percent. Other central banks cutting rates were the Swiss National Bank, The Bank of Canada and the Swedish Riksbank.

Gold Breaks another Record: Surges Past $1,000 Mark

Investers continue the surge toward commodities, with Gold prices going beyond the $1,000 mark for the first time in history; as measured by U.S. dollars. With the dollar continuing to weaken, and signs that the Fed may cut interests rates by another 0.75 percentage points next Tuesday, we'll probably see this trend for some time to come.

As we talked about in the last post, the weakening dollar is also driving up the costs of oil, which is being driven up by investors (rather than supply and demand), as they are exiting the equity markets in huge numbers.

The U.S. dollar dropped to a new low against the euro, going to $1.56, while against the pound it was $2.04.

CEBR economist Richard Snook had this to say about it all: "It may be too late for the US to avoid recession but with prompt action the Fed hopes to ensure that the economy bounces back quickly."

Jim Rogers on US Economy, FED, Ron Paul, China, US Dollar

For this first post on Commodity Surge, I thought I'd include this interview in late November 2007 with commodity expert Jim Rogers.

Keep in mind when he's talking about what has real possibilities in the commodity market, that it's somewhat dated information.

Other than that, the underlying foundation of why he makes the comments he does is extremely important and valuable to learn.