In the currency market, the dollar was sharply lower against the euro. Late Tuesday, the euro was trading at $1.2707 vs. $1.2452 on Monday. All eyes were turned toward the Federal Reserve, which began meeting yesterday and will issue its interest rate pronouncement around 2:15 this afternoon, but the preliminary action in equities yesterday (Dow up almost 900) clearly indicated an expectation for a major cut.

“Now more than ever, the Fed’s decision could turnaround the currency and equity markets,” wrote Kathy Lien, of GFT Forex. “The recent strength of the U.S. dollar will add pressure on the Federal Reserve to make a larger interest rate cut but everyone needs to realize that the rate cut by the Fed this week will not be their last.”

Perhaps not, but if the expected cut of half to three-quarters of a point materializes, there won’t be much further to go. Some are even saying the rate could go to zero a la Japan, in a desperation move to pump up the economy.

That the economy needs plenty of pumping was confirmed by yesterday’s report from the Conference Board that consumer confidence plunged to 38 in October from 61.4 in September. That far exceeded economists’ expectation for a drop to 52, and marked an alltime low in the index’s 41-year existence.

Expectations turned “significantly more pessimistic,” the board said, with the percentage of consumers expecting business conditions to worsen over the next six months rising to 36.6% from 21%, and those expecting fewer jobs rising to 41.5% from 26.9%.

Consumers’ “earnings outlook, as well as inflation outlook, is also more pessimistic, and this news does not bode well for retailers who are already bracing for what is shaping up to be a very challenging holiday season,” said Lynn Franco, director of the Conference Board Consumer Research Center.

Source: Euro rallies against dollar -  All eyes on the Fed