Lower interest rates, while used to jump-start the economy, can also weaken a currency by giving investors less return on investments denominated in the currency.
The Fed's move put more pressure on the U.S. dollar because it made returns on investment in other countries more valuable. The weak dollar also means that American goods are cheaper for overseas buyers, which can help manufacturing and producers, and it can help companies with big foreign operations turn a larger profit by converting overseas profit into dollars.
On the other hand, a steadily weakening dollar could also discourage foreign investors who buy the country's debt. As investment in U.S. Treasury securities dwindles, the government will have to pay higher rates at weekly auctions to find buyers for its bills, notes and bonds. That eventually could push up borrowing costs for all Americans.
It can also hurt companies in the euro zone. Speaking in a radio interview, Airbus executive Fabrice Bregier said that his company's "Power8" cost-savings and restructuring program was based on a euro-dollar rate of $1.35 and aimed at generating 2 billion euros ($2.8 billion) in savings. If the euro rises to $1.45, he said Airbus would have to seek another 1 billion euros ($1.4 billion) in savings.
Regardless of an ECB rate cut, David Jones, chief market analyst at CMC Markets in London, said fears of more U.S. interest rate cuts could drive the euro higher.
He said that remarks by Fed Chairman Ben Bernanke before the U.S. Congress on Thursday did not assuage fears about the U.S. economy, but rather "reignited fears that there may be further bad news to come with regard to the U.S. sub-prime mortgage market."
Both Archer and Jones said that those fears are putting more pressure on the dollar and causing buyers to look to safer havens, namely the euro and the British pound. It is also likely that the dollar will continue to weaken, pushing the euro higher in value.
Jones said that it's not quite a crisis for the dollar but "it's fair to say that confidence in the greenback has been truly shaken."
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