Everyone knows that the US stock markets are like women suffering mood swing, yet they’re the main indicator of the economy’s health. And unfortunately, stock markets do affect currencies. Surging oil futures cause panic in stock markets, which in turn create down pressure on the Dollar.

What we experience now can hardly be compared to the past, because the 9/11 event has since changed our history. The US economy shouldn’t have been gravely suffered if that tragedy hadn’t taken place. After the event, the US tried to get back on its feet, creating what is now known “housing bubble.” The unethical behaviors in US lending industry created a false sense of recovery, when in fact, causing instability in the economy. More specifically, anyone with common sense wouldn’t understand why home prices doubled in less than a year, while neither demand nor supply could justify the increase. So a burst of these bubbles is not a question of “if” but “when.” It’s interesting to me that even the best economists couldn’t, and still can’t, figure how much damage that bursting result could do to the economy as a whole.

So my point is, the terrorists were very successful in causing serious damages to the US economy in the 9/11 attacks, whether we Americans want to believe it or not. Yet instead of working on a recovery in an educated way, most people got involved in the false sense of housing strength and unethical accounting practices, until the situation got out of hand. What now? What should we expect from this point on?

Let’s assume that there won’t be any terrorist attacks in US soil any time soon, we still have to face tougher challenges caused by the mistakes after 9/11. In other words, it will be harder to gain a full recovery, if any at all. As such, the US economy will not strengthen in the next few years.

What would that do to the dollar? Of course negative. The currency’s value reflects the health of the country’s economy. When an economy gets “sick,” there’s no way its currency stays healthy. The US Fed is now facing a dilemma: lowering interest rate to help out with credit crises and face higher inflation; increasing interest rate and stifle economic growth and further push the economy in recession. In any event, foreign investors would be very reluctant to invest their wealth in the US, causing the dollar to further lose value.

There’s at least one occasion that would bring more value to the USD, that is political pressure. In the event of international crisis, investors would run to something considered less risky like that dollar (some people call this “risk appetite”). Why is the dollar considered less risky? It’s because of the greater size of the US economy and the US influence in the world. In other words, it’s not likely that the United States would disappear or its economy would collapse completely. Therefore, in the event of war or other international disasters, smaller countries would be a lot more vulnerable to damages, making their currencies more risky.

Since terrorists’ attacks are very rarely considered that kind of international crisis, it’s not likely foreign investors would throw away everything else to grab the dollar. So the way I see it, conservative forex traders shouldn’t buy the dollar at this time.