So many others on Wall Street think that we need rate cuts to match others internationally, but not for stimulating our economy. Well if you read yesterday’s mailing, you’d know what’s really going on. Click here to catch up if you missed out. All the fuss for rate cuts could be much more for our dollar than anything that the rates themselves do. It’s clearly evident how the top retailers are doing it right in getting consumers to stay as the big apple feeding the economy. Click here to watch.
In spite of the Federal Reserve lowering rates, the U.S. dollar has been strong and getting stronger.
There are several reasons why the dollar’s appreciating and lots of implications for stocks and bonds.
It made sense when the U.S. dollar started rising as the Federal Reserve began raising rates in 2015.
When interest rates in the U.S. were higher than in other countries and the Fed announced it was going to start “normalizing” rates (raising them from artificially low levels) as the economy showed better strength, as deflationary fears gave way to talk about inflation prospects, as equity markets climbed higher, it made sense the dollar would strengthen.
That’s because when rate differentials widen, when the U.S. raises rates while other countries’ rates remain the same, money flows into the U.S. so it can be invested in higher yielding instruments.
In order to buy dollar-denominated U.S. Treasuries or U.S. corporate bonds, foreign investors must exchange their currencies into dollars. Those transactions, done in huge volumes, raises the dollar’s value relative to other countries’ currencies.
But the dollar didn’t move up dramatically against other currencies, because most of them were doing better economically too, and their central banks were expected to end their quantitative easing programs and eventually start to raise rates too.
But that didn’t happen…