Tough road ahead for dollar after Fed cut

NEW YORK (CNNMoney.com) -- With Tuesday's rate cut by the Federal Reserve, the prevailing thought among currency traders is that there is more weakness for the dollar in the months ahead.

The dollar fell sharply against the euro to a record low and remained slightly higher against the yen Tuesday afternoon after the central bank cut the federal funds rate by 50 basis points - its first rate cut in over four years. The rate affects how much interest consumers pay on everything from their credit cards to car loans.

The Fed also cut the discount rate, which it charges mainly to banks for temporary loans, to 5.25 percent.

A rate cut typically drives dollar-denominated investments lower, making the greenback less attractive to investors.

Omer Esiner, an senior market analyst in Washington at currency-trading company Ruesch International Inc. said the surprise rate cuts and a hint by the central bank that it was open to more policy easing does not bode well for the dollar.

"I think that is inherently dollar negative," said Esiner. "I would expect the dollar to continue to grind lower to the end of the year."

What could rescue the greenback, he said, are signs of underlying economic strength in the U.S. economy, or if other global economies such as Europe begin to experience softness.

So far this year, the dollar is down against the euro, hitting a record low against it last week on the belief that the Fed would take action at its monetary policy meeting Tuesday.

Against the yen, the dollar is up from lows earlier this year, but it has remained relatively steady in recent weeks.

A lower dollar typically drives domestic and overseas demand for U.S. goods, but it also poses an inflationary risk to the U.S. economy by limiting consumers' buying power overseas and typically pushing up the price of oil.

When the Fed began an interest-rate cutting campaign in 2001 in the wake of the Sept. 11 attacks, the dollar soon entered a sharp decline. The fact that the U.S. had also slipped into a recession only made matters worse.

David Jones, chief market analyst at CMC Markets, warned that the same fate could follow this time for the dollar if this cut isn't a one-time event, but only the first in a series of rate cuts.

"If we do go into a series of rate cuts in the U.S. that can only be bad news for the U.S. dollar."