Watch that dollar and watch those long rates

I want to show you two charts -- the first is of the Long Bond continuous futures contract. The second is of the Dollar Index. They illustrate the price action in both of these markets over the past three days. Keep in mind the Fed announcement came out at 2:15 p.m. or so on the 18th ...

Chart #1 (Long Bond Futures):

Chart #2 (Dollar Index):

Notice anything here? Both instruments are getting pounded! It's easy to see why -- the Fed is aggressively cutting interest rates in an environment where oil is at $82 a barrel and counting ... where gold is trading at its highest level in 27 years ... and where the dollar is on the edge of a precipice. The all-time low for the DXY was set in September 4, 1992 at 78.19 -- we were recently trading at 78.74. (Speaking of the dollar, we're now learning of risk that Saudi Arabia and other Middle Eastern nations could de-peg from the greenback. See this Daily Telegraph story for more details).

Then there are all the agricultural commodities -- wheat, soybeans, etc. -- that are trading at or close to all-time highs. In fact, the only place we're not seeing inflation is in the Consumer Price Index, which, as we all know, is 100% accurate and completely reflective of what we're all seeing in our daily lives (ahem...)

Look, markets are markets. They can change on a dime. So maybe this is much ado about nothing. But it seems to me the Fed is playing with fire here. Aggressively cutting interest rates may make the Wall Street crowd happy because they can now get out of -- or modify -- some of their aggressive takeover deals, their stupid debt investments, and their highly leveraged derivatives bets. It might even help with their confidence -- and according to the New York Times, things are really shaky there. In fact, $48 million Hamptons estates are no longer selling! The horror.

But at the same time, it runs a real risk of pushing the dollar off a cliff. As for mortgage borrowers and homeowners -- ostensibly, the constituencies the Fed is trying to help -- these rate cuts are a mixed bag. As I spelled out yesterday, lower short-term rates may help out some borrowers. But with both 10-year Treasuries and 30-year Treasuries falling in price, it's likely long-term fixed rate mortgages will get more expensive.

UPDATE: Right now, the DXY decline in percentage terms is 0.92%. That is the single-worst daily decline since 11/24/2006 – That was around the time of the dollar's “Thanksgiving week massacre,” when the euro surged from around 1.28 to around 1.34 in just a matter of days.