Plunging interest rates helped by a lower U.S. dollar are about to rescue both the U.S. housing and stock markets, says US currency specialist Mike McDonald. Not next year, but immediately.

McDonald notes that since June, one year U.S. Treasury bill rates have fallen from 5% to an astonishingly low 3%, while 10-year Treasury rates (to which 30-year mortgages are indexed) have declined from 5.2% to 4%, with most of the decline happening in the last month. McDonald's thesis is that the recent plunge in interest rates has, almost overnight, changed everything. "The doomsday scenario painted by Wall Street over subprime mortgages and housing is suddenly way overblown."

WHY IS THIS HAPPENING?

The Fed controls short-term interest rates; longer-term rates are at the mercy of foreign investors who are the primary buyers of U.S. Treasury bonds and bills. Japan and China combined own close to 60% of the US Treasury debt.

"The lower U.S. Dollar finally brought in foreign investors looking for bargains," says Mr. McDonald. "The worry that the Dollar could free-fall does not seem to worry foreign investors today. I agree. In fact I'm expecting a higher dollar and lower rates. Right now I believe the dollar is poised for a significant long term rally."

"With much lower interest rates, many people with variable mortgages will find they can afford the new re-set payments after all. Foreclosures should drop dramatically, the housing glut should level off, and housing prices will then rise. Lower rates should also increase the number of qualified homebuyers by as much as 40%," says McDonald.

McDonald concludes, "It's not as bad as they say. Many companies - such as HSBC, GM, Merrill Lynch, and Citigroup - used default assumptions based on higher interest rates to calculate cash flow yields and wrote off billions in mortgage-backed CDO assets. This could be way off the mark. These CDOs now look like bargains to me, and cash flows from CDOs should come in much higher than expected."