Let us say that the 'optimistic reading' is in reality true, but premature - that the Fed will eventually begin to cut rates. Everybody seems to be in agreement that the dollar would be 'cratered' - that the declining dollar value, while of benefit in shrinking the actual payoff of US debt, would cause a wholesale movement out of US investments. For one example, a rising Japanese rate in the face of a declining US rate would end carry trade.
But... the next step in logic says that a wholesale run out of US investments makes a liquidity shortage that raises the value of the dollar. So does decreased liquidity due to the end of carry trade. So does an increased competitive trade position for the US.
So, is the claim that "a decreasing rate would lower the value of the dollar" really a valid one?
Isn't the critical point here that it does not matter what the Fed does in isolation, but rather what it does relative to what is done by others?
Commenting by HaloScan
