Skip to main content
Category

Federal Reserve

Sep 02
Examination of the influence of the US Dollar in the markets today

US Dollar Strength as Interest Rates Rise

By Currencies, Currency, Federal Reserve, Interest rates, Investing No Comments
US Dollar strength is influenced by the Feds interest rate policies

US Dollar strength is influenced by the Feds interest rate policies

US Dollar strength has been energized by higher rates since the beginning of 2022. Good news for you if you’re long. A stronger US currency makes it cheaper to import foreign goods and services. On the other hand, it can cause weaker export demand. Domestic manufacturers may see slowdowns in exports. It may also ease inflation pressures. With the Federal Reserve expected to continue raising interest rates this year, it may be good news for dollar bulls and bad news for bears…for now.

Higher Interest Rates Bolster the Dollar

The U.S. dollar is the most recognized financial investment in the world. It is a safe-haven asset, utilized in times of market stress. Now that the U.S. economy is currently growing at a decent clip, we can expect the Fed to increase interest rates in the coming months. Higher interest rates should help to control inflation and boost the value of the dollar.

Federal Reserve Focus is On Inflation, Not Recession Fears

The Impact of a Stronger USD

A stronger currency can have several negative consequences for the economy. A rising greenback makes U.S. goods more expensive on the global market. This may lead to weaker export demand. This strength can also lead to reduced demand for U.S. goods and services, which are priced in dollars. Additionally, a rising dollar can create inflationary pressures, as a stronger currency can make imports cheaper. In time, its strength could limit growth, as it becomes more expensive for American companies to import goods. A weaker dollar could lead to increased inflation, as goods and services become more competitive on the global market. Weakness in the US Dollar would also be a boon to exporters as foreign demand for American goods picks up.

Long-term Outlook for U.S. Dollars Value

A rising interest rate environment is typically positive for the dollar, which is why it’s important to take a long-term view when investing in the greenback. While it’s true that our currency is likely to appreciate in the near-term, it’s also important to consider how it will fare over the next decade. There has been speculation of other alternatives to replace the US Dollar as the reserve currency, but we don’t see this happening anytime soon.

Is it Time to Buy USD?

If you believe that the U.S. economy will outperform other economies, then it may be a good time to buy the USD. First, determine whether it’s overbought or due for a correction. What is its current trend? Try to gauge public sentiment by monitoring the most recent headlines. If you see more positive headlines regarding the U.S. economy, it’s likely that the dollar will continue to appreciate.

US Dollar Chart

Bottom Line

Investors should always monitor the U.S. dollar’s strength. Significant strengthening in USD can lead to economic weakness. The dollar’s strength is largely dependent on interest rates, so investors should keep an eye on Fed policy. If you believe that the U.S. economy will outperform other economies in the future, then it’s a good time to buy the U.S. dollar.      FEL-PM-220831

Trading futures and options involves substantial risk of loss and is not suitable for all investors.  Past performance is not necessarily indicative of future results. This matter is intended as a solicitation to trade futures and options.     

 

Aug 19
Federal Open Market Committee

FOMC: Are Investors Underestimating Fed’s Resolve

By Federal Reserve, FOMC, Interest rates, Investing, Stocks No Comments
FOMC: Investors May Be Underestimating Fed's Resolve

The Federal Reserve is poised to raise rates yet again

‍The Federal Open Market Committee (FOMC),  otherwise known as the Federal Reserve or Fed, has proven its resolve to normalize monetary policy by raising interest rates. You may have read that many investors are underestimating the central bank’s resolve in its upcoming meetings. Several recent statements from voting FOMC members have indicated that more rate hikes are inevitable. Its focus, reducing inflation. As a result, they will continue to tighten monetary policy even if equity markets react negatively. What should our next steps be as investors?

Why Investors Are Underestimating the Fed’s Resolve

There are a few reasons why investors are underestimating the FOMC resolve. We have been expecting the Federal Reserve to pause in the face of a potentially volatile correction. Recent experience tells use when things go haywire with the markets the Fed jumps in and lowers rates. This has been true, but we have not had inflation in the equation. The Fed-funded survey of business confidence has shown signs of weakening, which may give the Fed pause in its decision-making.

The key role of unemployment in the Fed’s decision-making

There are reasons to believe that the FOMC is prepared to continue its rate hiking campaign. Consider the Fed’s primary focus, inflation, and the trajectory of the labor market. The Fed’s tightening campaign has been dependent on the state of the economy. Since the beginning of 2022, the Fed has been steadily reducing its balance sheet, which has kept the central bank on track with its plan to normalize monetary policy and bring an end quantitative easing.

See: Federal Reserve Focus is On Inflation, Not Recession Fears

Equity market implications of anticipated rate hikes

Short-term implications of higher interest rates may be bearish for stocks. Equity markets have been supported by an accommodative monetary policy, which has allowed companies to issue debt at record low rates. As rates are raised, the higher costs may weigh on company earnings as companies issue more expensive debt. You may have noticed that the yield curve is inverting, an indication that investors expect lower growth in the future. This inversion may be a signal of a market correction or recession in the not-too-distant future.

Potential Fallout

Higher rates negatively impact fixed-income investors, as higher rates may put downward pressure on bond prices. As the Fed continues rate hikes, it puts pressure on the short-term rates, making it difficult for borrowers to service their debt. Higher rates may increase the U.S. dollar value. This hurts U.S. companies that derive their revenues from abroad.

The Importance of Understanding the Fed

The Federal Reserve has a dual mandate of maintaining full employment and keeping inflation in check. The FOMC may be approaching its intended goals on inflation. The Fed’s survey of business confidence has shown signs of weakening in recent months, which may indicate that the Fed is approaching its employment goal. The FOMC seems eager to hike rates and end its stimulus campaign. Expect continued market volatility. As investors, we must prepare for the Fed’s continued rate hikes. We should strive to understand its decision-making process and adjust our investment strategies in a rising interest rate environment.       FEL-PM-220819

Trading futures and options involves substantial risk of loss and is not suitable for all investors.  Past performance is not necessarily indicative of future results. This matter is intended as a solicitation to trade futures and options.