Cut or Don't Cut

Why am I saying that the Fed is in a dilemma? Come Sept18, the market expects the Fed to cut rates by 25 basis points with 2 more rate cuts thereafter. Now the big question - what if the Fed DO NOT cut rates? Simple - the market would likely fall sharply. If they cut rates by 25 or 50 basis points (within market expectations), chances are, the market would likely fall too but at a slower rate. Why? Buy on rumour, sell on fact! The markets have been rallying on expectations of a rate cut. I expect profit taking to set in should the Fed cut 25 or 50 basis pts of the rates.

So, where is the dilemma? The US Dollar!!! Fed cuts rates by more than 50basis, the US Dollar will plunge. The US dollar is starting to weaken against other major currencies as I write this mini piece. Would the Fed want a weak dollar when it is printing so much money. High debts would then become higher debts!!!

How does it affect the stock market? If the US dollar weakens, would fund managers wanna hold US stocks? In Euro terms, these stocks would be worth much less if US dollar depreciates. As US dollar weakens, then Fund managers would likely move the fund to other regions like Europe or Asia. Weak dollar drives away foreign investments. What would the Fed do next? Cut or Don't Cut?