An interest rate hike has been on the cards for several months, but with the US Dollar (CURRENCY:USD) appreciating, it could be delayed further. In fact, the Central Bank of America, the Federal Reserve, could lower interest rates to weaken the American Dollar, in a bid to help the U.S. remain internationally competitive. It has been speculated that the US Dollar could surpass the Pound as the 3rd most valuable currency in the world.
2 Interest Rate Hikes Were Planned, Strong US Dollar (USD) Disrupts
After it was announced that the UK voted had to leave the EU on the 24/06/2016 (“Brexit”), the value of the US Dollar (CURRENCY:USD) increased relative to the British Pound (CURRENCY:GBP) (by up to 10% at some points.) The Federal Reserve may ditch plans to increase interest rates, & they could potentially decrease them to weaken the US Dollar.
According to an article published on CNBC on the 06/06/2016, the Chair of the Federal Reserve, Janet Yellen said “Next week, concurrent with our policy meeting, the FOMC participants will release a new set of economic projections. Those could, of course, differ from the previous set of such projections in March. But speaking for myself, although the economy recently has been affected by a mix of countervailing forces, I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones.”
The above extract (from Yellen’s speech last month) suggests that 2 interest rate increases were potentially scheduled for 2016.
Rising US Dollar Threatens U.S. Economy
Although a powerful currency gives Americans & U.S. based firms more purchasing power in an international context, allowing them to import more, it can harm the domestic economy. American goods & services will be more expensive for other countries to import, so consumers & firms in other countries may switch to alternatives.
An appreciating US Dollar (CURRENCY:USD) also makes Crude Oil cheaper, as oil & most world commodities are currently priced in American Dollars. This could affect other world economies. It should also be noted that many countries other than the United States of America use the American Dollar as their domestic currency, so changes in its value can have vast implications.