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The U.S. Dollar Is Meeting Strong Resistance

The Federal Reserve might cut rates again before year-end, as the measures taken by the U.S. government are just getting into the economic system. The U.S. dollar, in the mean time, is finding a strong resistance at current levels, albeit the short term trend stays bearish for now.

More weakness expected for the U.S. economy

The concentric work done by the U.S. Treasury and the Federal Reserve requires time to get fully into the economic system, although more work needs to be done to restore confidence and allow businesses to create new jobs again. Mr. Bernanke confirmed last week that the Fed will continue to use all possible tools available to face the strong economic contraction. Consequently, a new rate cut of 50/25 basis points is probable before year-end. The decline of the equity markets, after the long and large capitulation of housing wealth, is further tightening the household budgets. Retail sales moved down 1.2% in September, despite the important tax rebates that started around mid year, and housing starts are 31% below the level of one year ago. What’s next? The third consecutive contraction of retail sales, which only happened four times in the past fifty years, anticipates more weakness ahead for the U.S. economy. In fact, it then took almost one year for consumes to pick up again. However, saving rates could increase in the coming months, as consumers are preparing for the tax hikes that will cover the many rescue plans approved by the U.S. government. Last week, the U.S. Treasury and the Federal Reserve provided a detailed three steps plan, which tracks the European approach to the financial crisis. First, the FDIC will temporarily guarantee senior debts and deposits in non-interest accounts. Second, the Treasury might inject up to $250 billion into banks using preferred stocks. Finally, an unlimited amount of commercial paper will be bought for a few months to sustain the credit markets.




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