Hi G Man,

Glad to hear from you and thanks for the comment I am glad to have you participating in the site.

In short yes I think many would agree that with everything that is going on with the housing market, the financials, and the economy as a whole raising interest rates right now could be dangerous.

The fed is really caught in a difficult situation here because inflation is running very high (which many would argue means the fed needs to raise rates) while at that same time the economy is struggling and we have these issues which you have pointed out (which many would argue means the fed needs to hold pat).

So now lets think about this for a second. Ideally the best way for the fed to reign in inflation would be if there was a way that they could do so without having to actually raise rates. If the US Dollar strengthened either from the US Government stepping up rhetoric or through currency market intervention, then a stronger dollar would lead to lower prices for US Imports such as oil which would also tamp down inflation.

So basically what I think you saw a couple of weeks ago was two things:

1. The fed signaled that they were at least done cutting interest rates and may raise in future meetings (while no one is expecting them to raise this week fed funds futures are pricing in an increase of .25 at the next meeting)

So the fact that they indicated they were done cutting and may increase rates in the near future was dollar bullish in and of itself and the market reacted accordingly.

2. On top of this the President, the Secretary of the Treasury and the Chairman of the Fed came out and talked openly about US Dollar weakness and how they were not happy with it. While the US has always had a strong dollar policy all three of these positions, especially the fed who never talks about the dollar, coming out and talking about it in the same week sent a message to the market that there was only so far they were willing to let the market go.

So when you combine both of these things in my opinion you have the explanation for why the dollar rallied.

Discussions like this are exactly the type that I hope we can have more of on this site so if you feel differently or if you have any questions please fire away.

Best Regards,
Dave