The Fed signals additional rate cuts, and the dollar's decline continues

Higher interest rate currencies tend to rise against lower interest rate currencies, all other factors being equal. For example, with the Fed likely to lower key, short-term interest rates by 50 basis points at its next meeting in March, the yield spread will widen between the dollar and euro, due to the European Central Bank's stand-pat monetary policy. That widening spread will place more pressure on the dollar versus the euro as investors move money into the higher interest rate currency.

Trade deficit, economy weigh

Economist David Felsen told BloggingStocks Friday the dollar is also being hurt by the U.S. trade deficit and by the U.S.'s less-competitive equity assets. "The trade deficit results dollars flowing out of the U.S., into other currencies to pay for those good and services, which hurts the dollar. Oil imports are a big factor there," Felsen said. "The U.S. stock market also isn't performing well because of the economy, which means foreign investors are less likely to buy dollar-denominated assets, which is also hurting the dollar." Felsen added that he has no trading positions in any currencies, but he does own stock mutual funds.

Felsen added that he expects the dollar to weaken further this year against the euro, to $1.60-$1.65, and to 100 or 95 yen against the yen, by the end of 2008, absent a major U.S. economy recovery and consequent interest rate increases from the Fed.