Wall Street may interpret lower interest rates as good news for stocks, long-term, but that will not be the case with the U.S. dollar. Along with the current account, and investment performance in a particular country, a major factor in a currency's strength is the interest paid on deposits. Generally, currencies with high interest rates are valued higher than currencies with low interest rates, all other factors being equal.
Currently, the European Central Bank's key interest rate is at 4.00%; the Bank of England's, 5.75%; Canada's, 4.75%; Australia's, 6.50%, and the U.S.'s, 4.75%.
Not surprisingly, the U.S. dollar is trading near an all-time low against a basket of six currencies.
On September 18, 2007 the U.S. Federal Reserve cut its target rate for overnight bank loans by one-half percentage point to 4.75%, the first interest rate cut since 2003, after losses from sub-prime mortgage investments nearly froze credit markets. The Fed's cut, along with several interventions by world's major central banks, provided essential liquidity that enabled the credit markets to function. However, the Fed's rate cut also contributed to the dollar's latest retreat against several major currencies, including the euro and the pound. Late Monday the euro traded at $1.4404 and the pound at $2.0602.
Most analysts expect the Fed to cut key interest rates by one-quarter percentage point, or 25 basis points, when it announces its decision Wednesday at 2:15 p.m. EDT. Analysts will also evaluate the Fed's statement for possible changes in its bias/evaluation of economic conditions. Analysts are less certain about the prospects for a third Fed interest rate cut at its final meeting of the year on Dec. 11. Any further rate cut then would depend on the amount of jobs created in the economy and level of inflation, as well as the overall condition of the U.S. economy as measured by GDP.
Market Analysis: The much-anticipated quarter-percentage point interest rate cut by the Fed is needed to stimulate a sluggish U.S. economy, but investors should not look for more than that at Wednesday's meeting and at the Dec. 11 meeting. The quarter-point moves allow the Fed to gradually provide monetary stimulus to the economy without precipitating sudden, major shifts in foreign exchange rates. Further, with a Fed rate cut Wednesday, the dollar is likely to gradually fall further against the euro and pound, but how much it falls before leaders in Europe and the U.K. say their currencies are too strong and hurt export sales is open to debate.
Not surprisingly, the U.S. dollar is trading near an all-time low against a basket of six currencies.
On September 18, 2007 the U.S. Federal Reserve cut its target rate for overnight bank loans by one-half percentage point to 4.75%, the first interest rate cut since 2003, after losses from sub-prime mortgage investments nearly froze credit markets. The Fed's cut, along with several interventions by world's major central banks, provided essential liquidity that enabled the credit markets to function. However, the Fed's rate cut also contributed to the dollar's latest retreat against several major currencies, including the euro and the pound. Late Monday the euro traded at $1.4404 and the pound at $2.0602.
Most analysts expect the Fed to cut key interest rates by one-quarter percentage point, or 25 basis points, when it announces its decision Wednesday at 2:15 p.m. EDT. Analysts will also evaluate the Fed's statement for possible changes in its bias/evaluation of economic conditions. Analysts are less certain about the prospects for a third Fed interest rate cut at its final meeting of the year on Dec. 11. Any further rate cut then would depend on the amount of jobs created in the economy and level of inflation, as well as the overall condition of the U.S. economy as measured by GDP.
Market Analysis: The much-anticipated quarter-percentage point interest rate cut by the Fed is needed to stimulate a sluggish U.S. economy, but investors should not look for more than that at Wednesday's meeting and at the Dec. 11 meeting. The quarter-point moves allow the Fed to gradually provide monetary stimulus to the economy without precipitating sudden, major shifts in foreign exchange rates. Further, with a Fed rate cut Wednesday, the dollar is likely to gradually fall further against the euro and pound, but how much it falls before leaders in Europe and the U.K. say their currencies are too strong and hurt export sales is open to debate.
Nuclear power is on the comeback trail
Apple backs AT&T in continuing spat with Verizon
Closing Bell: The recession is still over, still... do you feel it?
