A friend is planning a shopping trip to the US in December, and was telling me earlier that she was told now would be a good time to purchase dollars, due to the US cutting the Fed rate.

Now I've never studied economics, so I'm trying to figure out the reasoning, but I would have thought that it would work the other way around.

I'd have thought a lower US interest rate results in:
1) Greater inflationary pressure due to more cash in pockets, leading to a reduction in purchasing power;
2) Greater attraction to gold and other commodities, as well as stronger currencies.

My understanding is that both of these will result in a weaker dollar, although I'm not fully clear how (1) works, nor how fast it's effect is, given the four-month timeframe I'm looking at.

On the premise that October is when US sub-prime exposure levels are really expected to be felt, and that the US may have to react then with another rate cut, would it be reasonable to expect the rate in November to be higher than today's rate?

I would have thought that with the expected market volatility, gold would become more attractive - does this weaken the dollar more than it weakens the euro, or would it affect both in equal measures?

I'm aware also that the ECB injected funds into the market, is this to reduce the call rate, and if so, what exactly does this mean, and does it in itself also weaken the Euro? I assume there is a weakening effect due o the increased quantity, but I don't know if I'm right - my understanding is that without strong credit growth, it does weaken the currency, am I right?

Also, would this have weakened the Euro by a greater factor than the Feds cutting the lending rate would weaken the Dollar?

AFAIK the US trade deficit is likely to keep increasing, and the budget deficit isn't likely to come down. Are there other factors that I'm ignoring?

By the way, I told her that her friend probably knows more than me, so this is more academic for me. I only ever went to the Life School of Economics.

The one thing that I do know is it doesn't matter how much theory you know, if you don't know what the hedgers are currently doing, and that's a definate blank for me.

I'd be interested in any reading recommendations people have that might help me understand.

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If its a good rate and you are happy with the buy as otherwise will spend lots of what if time.

Best day for shopping is Black Friday - day after Thanksgiving as thats the start of Christmas shopping and many stores open at 5am offering 60-70% off across the store.

Reason its called Black friday as that was the day when stores moved from being in the red all year into the black.

If thats a bad day on sales for retailers then market will tank as highlights Christmas trading will be poor.

Bertie, go do your "research" somewhere else.

A lot of people go to catch the sales at Woodbury Common in upstate New York--it's about 90 minutes north of NYC. The sale opens at midnight and is one of the biggest in the north-east. If your friend is going there, tell her to be sure to be there before midnight, pick her primary 3 shops, and get in and out as fast as she can. Queues form and it can take one hour to be let into a shop and another hour in a queue to pay. Upwards of 100,000 crammed everywhere.

There is not that much difference between the common and the Century 21 store across from the WTC.

These places are for dedicated shoppers, like my other half. To me, it's the closest thing to Hades.

Brilliant!

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Is Bertie preparing to pay back the 45k dollars to a Charity, I'm sure the lads at AIB will help him out, they have the research done already and know where to take the funds from.

Heh, you're mean, but I like it. If you hear waffle about exchange rates in the tribunal, then I guess I've been outed...

I actually don't give a toss about where the good shops are, although the spirit of those posts is appreciated, I was actually just wondering which parts of my analysis of the different factors on the exchange rates are correct, and which are incorrect. I thought it might be a learning exercise.

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http://en.wikipedia.org/wiki/Interest_rate_parity

That's based on the premise that lower interest rates in the US will cause capital flight from US security assets, which means more dollars come onto the markets which means they are cheaper to buy.

The reality is much more complicated.

The best way to judge the wisdom of buying a currency is to view that currency as a commodity, in the same way as you would view a house or a second hand car.

If demand for that currency is likely to increase, its a good time to buy. If demand is likely to reduce, its better to wait.

The demand for US dollars if effected by all sorts of things:

Oil prices
Fed Interest rates
Trade deficits
Budget deficits
Supply/Demand of/for Euro and Yen
etc etc

There isn't any easy way to predict; thats why you have currency traders. Perhaps the most scientific way is to use Purchasing Power Parity:

Take a product that is produced in the Euro Zone and the US with broadly the same cost base.

Compare the price rate differential with the exchange rate differential and you should get an idea whether or not a currency is currently under/over valued. Factor in a bit of market sentiment and that's about as good as you'll get.

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Purchasing Power Parity isn't relevant to interest rates. Its relevant to differences in the prices of goods and services between different currency regeimes.

As per the link I provided above, I expect that your friend expects the dollar will rise due to interest rate parity theory. That is in short the theory different current interest rates reflect the different expected future values of two currencies. As with all economic theories it has its limitations, so I wouldn't make any speculations based on this theory alone.