EURO FALLS ON ECB WILLINGNESS TO LOWER RATES

Two rate decisions were made in Europe this morning. The Brits lowered short-term rates by a quarter of a point for the second time in three months (as they were expected to do). That weakened the British Pound further, which has now fallen to the lowest level since last spring. The pound peaked in November in anticipation of that move (as markets usually do). The ECB held Euro rates unchanged at a six-year high of 4%. More importantly, its president signalled that he's open to cutting Euro rates for the first time in almost five years. Naturally, the Euro is starting to fall in anticipation of that inevitable easing. Today's 1% fall against the dollar puts the Euro even further below its 50-day average and in danger of forming a double (or even triple) top near 1.49. That raises the inevitable question about the fate of the U.S. dollar, and the implications of a possible rebound in the greenback.

DOLLAR COULD BE BOTTOMING ...

The daily chart of the U.S. Dollar Index is a mirror image of the Euro. The USD has bounced off support near its November low and has risen back over its 50-day moving average. That sets up a possible "double bottom" in the making. For that to actually happen, the USD still needs to clear its December peak just below 78. One of the reasons the dollar has been so weak has been the perception that the U.S. economy is weaker that the rest of the world. It was assumed that the Fed would have to start lowering short-term rates to prevent a U.S. recession (which they did last August). It was further assumed that foreign markets would be relatively immune to U.S. problems, and would be able to keep their rates steady and their currencies firm. The new realization of "economic recoupling" means that foreign central bankers will have to start lowering rates soon to combat their own economic problems. That process is being sped up by the recent fall in foreign stock markets. Since markets discount the future, the Euro (which has the biggest influence on the dollar), has already started falling. The Fed is at least six months ahead of the ECB in lowering rates. That means that foreign bankers will have to start playing catch-up to the Fed. That should work against foreign currencies and in favor of the dollar.

Stay tuned.