With investors awaiting the Fed's interest rate decision, the focus of the decision will be felt in the currency markets. In an AP report: "The Federal Reserve is poised to deliver another interest rate cut to millions of people and businesses this week, although that could be the last break they get for a while."

This scenario may be just what the doctor ordered for the dollar. In anticipation of the announcement, the greenback has staged a minor technical rally, albeit on lackluster volume. If the currency market would get the news that future rate cuts are on hold, the dollar may very well start a recovery.

The reason for the recovery is twofold: Firstly, there is interest rate differential. This has been the major driver in the currency market over the last few years. If the Fed would signal an end to rate cuts, by definition this would mean that the differential would no longer widen. The second reason is economic growth. The US was the first major country in the world to enter this period of lackluster growth and with the steps taken( fiscal stimulus and rate cuts), the right measures were implemented to make sure that the US is the first country to get out of the mess. My hunch is that we will see currency markets move away from the 'interest rate differential trade' to that of one focused more on growth.

As I have mentioned many times, the situation in the Euro-zone is nothing to write home about. Surging inflation, slow growth, the banking sector in turmoil. Sounds familiar. The only difference is that the ECB has done nothing to try and right the ship, while the Fed has. Ultimately, when the US gets back to above-average growth late this year or early '09, the aggressive stance the Fed took will be viewed as the reason for the recovery.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer's fund has no position in any stock mentioned, as of 4/29/08

Fed pause could be break for the Dollar originally appeared on BloggingStocks on Tue, 29 Apr 2008 09:20:00 EST. Please see our terms for use of feeds.