Dollar dives to new low against euro after Fed rate cut

Dear readers,

Yesterday when I posted on the sighted gold weakness, the reason found was due to the speculations that the Federal Reserve would not cut interest rates in the upcoming Federal Reserve meet. I decided that the drop wasn’t justifiable and took the plunge into more gold yesterday.

Today, we see a boost in gold prices due to the Federal Reserve’s decision to cut interest rates a quarter point to boost the U.S. economy. Personally, I see it as a short term solution to the problem and the cut in interest rates simply slows down the pain and does not cure the problem. I foresee the dollar to fall further.

Here’s an article from Forbes on the interest rates cut:

The Fed Plays It Again
10.31.07, 3:00 PM ET
Andrew Farrell

The Federal Reserve didn’t pull any surprises Wednesday and cut interest rates by a quarter point to give the sputtering U.S. economy a boost.

The Fed announced that it cut its federal funds target rate by 25 basis points to 4.5%. Wall Street had already widely expected such a cut as the U.S. economy struggles from tightened credit markets, a weak housing market, and a hobbled consumer.

The Federal Reserve began cutting interest rates last month as problems in the credit and housing markets reached a fever pitch. In September, it slashed the rate by 50 basis points to 4.75%. (See: “Christmas In September”)

On Wednesday, the Fed also cut its discount rate by 25 basis to 5.00 %. Banks use the so-called discount window to borrow money directly from the Fed, rather than from each other, which is the more common way that they obtain short-term financing. (See: “Everybody Loves A Discount”)

While a rate cut is a win for equities, it isn’t without risks. Lower interest rates spur inflation, which is already running at uncomfortably high levels. The Labor Department’s Consumer Price Index is now up 2.3% year-over-year. The CPI measures the prices of a fixed basket of consumer goods and is a widely used inflation gauge. The Federal Reserve likes to keep inflation under 2% a year.

An interest rate cut also undercuts the already weakened dollar, as lower interest rates boost the availability of dollars, in turn lowering their value. Over the past year, the dollar has fallen 11.6% against the Euro.

Ironically, the cut came on a day of when the outlook on the economy brightened. An analysis of payroll data showed that employment jumped sharply in October and the Labor Department announced that the third-quarter gross domestic product grew at a higher-than-expected rate. (See: “Job Market Picks Up”)

A rate cut could boost the value of gold as the commodity is often used as a hedge against a weak dollar and inflation. Gold miners traded mostly higher Wednesday. Shares of Eldorado Gold (amex: EGO – news – people ) gained 14 cents, or 2.1%, to $6.95; shares of Goldcorp (nyse: GG – news – people ) gained 78 cents, or 2.3%, to $34.55 and shares of Northgate Minerals (amex: NXG – news – people ) gained 14 cents, or 4.4%, to $3.31. (See: “Fed Rate Cut Offers Golden Opportunity”)

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