US Dollar Index (USDX) crashes below 80 after Fed rate cut to zero percent, ZIRP era begins

The Federal Reserve cut the main US interest rate to as low as zero for the first time and shifted its focus to the amount and type of debt it buys, seeking to revive credit and end the longest slump in a quarter-century. The Fed "will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the Federal Open Market Committee said today [16 Dec 2008] in a statement in Washington. "Weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."

9 rate cuts in the prior 14 months and $1.4 trillion in emergency lending had failed to reverse the economic downturn. The Fed said it will target a federal funds rate of between zero and 0.25%, a reduction from the 1% level that the Fed failed to hit. "The Fed is sending a message that it will print money to an unlimited extent until it starts to see the economy expanding," William Poole, former president of the St. Louis Fed said.

- Well, it's about time that Ben "Printing Press" Bernanke lived up to his moniker. With a Fed rate cut to zero percent, the ZIRP (Zero Interest Rate Policy) era begins. But Japan has already tried that and all they got was a "lost decade" of deflation, and a yen carry trade that contributed to a bunch of grand global distortions after that.

Meanwhile, the US dollar has plunged after the Fed rate cut. From the combo gold/oil/forex live quotes page, we see that at this point, the USD/JPY has fallen below 90 to reach 87, reportedly a 13-year low, and EUR/USD has recovered to 1.44, and USD/SGD has dropped to 1.43. That is quite a dramatic drop, and the USDX chart above shows it pretty clearly. The USDX has crashed below the critical level of 80 in what looks like a classic if not very pronounced head-and-shoulders formation. That has pulled gold prices up to $850, which is also a critical level, being the famed Jan 1980 resistance level. We are balanced on the proverbial knife edge now, with gold and the US dollar sitting at over 20-year resistance/support levels.

This is the trigger event that many in the contrarian community have been waiting for. The community has called for US hitting zero interest rates years ago in advance of the fact. What happens next is the trillion-dollar question. The deflationists are pointing at Japan, while the inflationists are pointing at Zimbabwe. The community consensus for now seems to be Japan-style deflation for the short term, *followed by* Zimbabwe-style hyperinflation further out. We'll see.

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