Dollar Drama Takes Nasty Turn

Against all odds, currency calculators could end up being fall's hottest accessory.

But, if you're shopping this weekend, don't get one made by Louis Vuitton, because European goods are more expensive than ever this season for anyone spending U.S. dollars. Indeed, European goods are getting more expensive for anyone whose money is pegged to the dollar.

Now that the Federal Reserve has made its move to stem the paralysis in the credit markets and subsequent economic weakness, investors are doing the cost-benefit analysis. In the short days following last Tuesday's cut, the costs of a weakened currency seem to outweigh the benefit of a resuming stock market rally. Another round of data, earnings and worldwide reaction will provide more details.

"This policy choice will entail higher rates just over the horizon to account for what will surely be an increase in core prices due to lax monetary policy today," writes Joe Brusuelas, chief economist at IDEAglobal. He adds that "the Fed had little choice but to respond to financial stress, but they did so at a long-term cost."

On the heels of fresh lows vs. the euro, the Canadian dollar and the British pound, traders will be focused on currency fluctuations next week to assess the inflationary impact of the Federal Reserve's 50-basis-point rate cut.

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