How holiday shopping may affect the dollar

A growing consensus on Wall Street seem convinced that U.S. central bankers will cut rates during the first half of next year to offset weak economic growth. But that isn't a done deal given the conflicting data.

A report from the Institute for Supply Management on Friday showed that the nation's manufacturing sector contracted in November for the first time in more than three years. In addition, two reports tracking activity in October showed durable goods orders had their biggest drop in more than six years and the median home price saw its largest year-over-year decrease ever.

But inflationary pressures are still running "uncomfortably high," according to Fed Chairman Ben Bernanke. He noted in a speech last week his discomfort with elevated "core" prices, which exclude energy and food costs and are closely watched by the Fed.

As long as the Fed cites inflation as a concern, there is less of a chance that its policymakers will start cutting rates. And Bernanke, in his comments made Nov. 28, repeated the central bank's interest in keeping open the possibility of a rate increase down the road, if such action would be needed to fend off inflation.

"A failure of inflation to moderate as expected would be especially troublesome," he said.

That's why so much may be riding on this holiday season. The way Americans spend before and after Christmas — the busiest time for buying all year, contributing half of all sales at some retail chains — could be a deal-breaker for the Fed.

Should the shopping season turn out a bust, then the Fed might see that as a sign of consumer fatigue and choose to cut rates in an attempt to stimulate growth. That could hurt the dollar.

Should sales top expectations, rates may remain steady or go up to contain inflation. That could support the dollar.

Still, it's important to note that Fed actions don't always correlate with the direction of the dollar's every move. In fact, what the dollar does in the coming months also will play into the Fed's decision on interest rates. Most important, the inflationary risks that come from the slumping dollar can't be ignored.

The thing about the dollar is that it tends to move in waves — the gains as well as the losses can last for a while. Come January, the outcome of the holiday shopping season will be known, but the fate of the dollar might not be as clear.

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