How the US Dollar Will React To a Higher Rate

One of the most talked about topics in the currency trading world right now is the Federal Reserve’s plan to increase interest rates. While the US dollar is trading on highs right now, that may not be the case in a few months. So, today we’ll take a look at the reason Federal Reserve interest rates are going up, when we can expect the change, and how the US dollar is likely to react. So, let’s get right to it!

Why Are Interest Rates Going Up?

It all goes back to the depths of the financial crisis of 2008 and 2009 that struck the world. In an effort to improve economic movement in the United States, the Federal Reserve reduced US interest rates to nearly 0%. However, when this happened, we knew that the low rates simply couldn’t last forever. When the United States economy started to look like it could stand on its own, the Federal Reserve was to increase rates.

The low rate has lasted several years without change; all the while, the US economy has been improving greatly. So, as the economy continues to show strength, it only makes sense that an interest rate hike is coming soon. The reality is that the economy has reached a point where it should be able to sustain growth on its own and no longer needs stimulus.

When Can We Expect Interest Rates To Go Up?

The answer to that question is really up in the air. While the Federal Reserve has been incredibly vague about when they plan to increase rates, they have said that we will most likely see a rate hike before the end of 2015. In the beginning of the year, experts, including myself expected to see the hike in June. However, 2015 economic growth hasn’t been quite as strong as 2014 was; so, estimates are being pushed back to September or later.

Would Anything Stop A Rate Hike From Happening?

At this point, an interest rate hike is almost inevitable. However, there is one case in which I wouldn’t imagine the Federal Reserve would increase rates; and it’s more likely than some may think. If the US economic growth starts to slide, the Federal Reserve will probably be incredibly hesitant to increase rates; and it’s not unlikely. The reality is that in March, the United States added little more than half the amount of jobs that analysts were expecting to see, consumer spending is dwindling to lows, and exports are falling because of the strong United States dollar. All in all, the danger could expand before a rate hike can happen.

What Would Happen To the US Dollar in the Case That Interest Rates Rise?

If and when the Federal Reserve decides to increase interest rates, we will most likely see declines in the value of the US dollar. As soon as interest rates go up, easy money in the market goes away; forcing investors to place a larger amount of their attention on risk management and causing most to avoid excessive risk. As a result, we should see a correction in the US stock market that will bleed into all financial markets associated with the nation; including the currency market.

Final Thoughts

It only makes sense that the Federal Reserve will increase the US interest rate. While in one circumstance, the rate may stay the same for the time being, all signs are pointing to a rate hike toward the end of the year. When this happens, we can expect to see downtrends in the value of the US dollar; giving savvy traders the opportunity to see gains. Happy trading everyone!