Every dollar cloud has potential silver lining for the small club investor

Ben Bernanke, the new chairman of the US Federal Reserve Bank, tried to resuscitate the ailing dollar at the end of November by talking it up with thinly-veiled threats of interest rate rises under the guise of protecting the US economy from inflation.

By the start of this month, its value was plunging again against all the major currencies; pretty terminal stuff? Well, no, we have been here, done that, got the T-shirt.

The dollar fell as low as $2.45 to the pound in November 1980 and almost reached parity at a high of $1.05 to the pound in November 1984.

On its way up in the Eighties, the dollar formed strong support around $1.90 to $2. When the dollar started to tumble again between 1984 and 1989, it formed resistance around $1.40, $1.50 to the pound on its way down to its support at $1.90.

It hit this support at the beginning of 1988, then climbed again to its resistance at $1.50 to the pound by the middle of 1989.

It has now found support at $2 in February 1991, September 1992 and probably Christmas 2006. It has met resistance at the $1.40 to the pound level in February 1993, late 2000 through to February 2002. The dollar has now meandered between its support at $2 and resistance at $1.40 to the pound for 20 years and it is two-all in testing its extremes of support and resistance, if you do not include the current testing.

If the dollar falls through the $2 barrier, conventional economic wisdom says the UK would have to start cutting interest rates to try and make the dollar stronger against the pound, making our exports to America more competitive. This would mean government securities would sore and the Investment Club would do oh so well.

Or the Fed could increase interest rates to support the dollar and the US economy would dive into a recession. Americans could not afford to buy British goods causing a slump in UK manufacturing. And what do you know, interest rates would have to come down.

If it is too good to be true, then it probably is. But what if the dollar is not in its death throws and bounces off $2 and climbs through the $1.40 resistance?

If the dollar does climb, then inflation would not be a concern for Bernanke and he could lower interest rates to try and bolster the housing market in the US. After all, US house sales fell by 3.2 per cent last month, the largest fall in 15 years.

Then a possible scenario might be the dollar rising, UK exports increasing, the American economy picking up with lower interest rates and share prices increasing on both sides of the Atlantic. That could be the fly in the ointment for the Investment Club because my stock management has been abysmal.

If the Club has to rely on equity profits to keep the unit price up then, on past performance, the Club is in for a lean 2007.

So the dollar's destiny does impact even small-fry. On the bright side though, the Santa Claus rally may help my equity selection put in a great end-of-year performance.