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How will rising U.S. Interest rates impact on the financial markets?

Federal Reserve - Interest Rates

After seven years of record lows, the Federal reserve finally increased interest rates by a margin of 0.25% last month. This historic moment had been anticipated for months, while banks and lending organisations throughout the U.S. had been championing such a move for a concerted period of time. The symbolism of this moment has also not been lost on society as a whole, as it arguably the first genuine sign of long-term recovery after the devastating global recession of 2008.

federal reserve rate decision

How will rising interest rates impact on the various components of the market?

While FX Pro reported that the financial market initially responded well to the announcement, there are some entities such as corporate bonds that may struggle should the current rate be sustained or even increased in 2016. Here is how the hike in U.S interest rates will impact on other aspects of the market: –

The U.S. Dollar will continue to grow in 2016

Although there remain a great deal of financial market experts who believe that the Dollar is approaching the end of its recent bull run, the recent hike in interest rates has surely extended its rally into the future.  We can certainly expect the Dollar’s growth to reach maturity at some point in 2016, but the decision to increase interest rates (even by a minimal amount) should guarantee further growth and prosperity throughout the first two quarters at least. The Dollar has already strengthened by 24% against other currencies since the summer of 2014, and while further growth may be limited there are definitely opportunities in the months ahead.

The Emerging markets face a period of Uncertainty as interest rates rise

During the course and immediate aftermath of the great recession, emerging markets expanded as the developed economies throughout the world slashed interest rates. We will now see a reverse of this trend, as rising federal interest rates will provide a stern challenge for emerging economies in terms of how able they are to cope with any capital overflows triggered by a stronger U.S Dollar. This is certainly something for investors and emerging market leaders to monitor during the formative months of 2016, as only those nations with a defined strategy will be fully prepared to cope with a resurgent Dollar.

The Euro may sink to a new low (but maybe not)

The Euro is the most resilient of all currencies, although on paper it appears as though the combination of rising federal interest rates and changing monetary policy in the Eurozone should drive this entity to record lows. The scenario is complicated by the uncertainty of future interest rate increases, however, while investors have also developed a fondness for using the Euro to fund trades for higher-yielding assets. When you consider these factors alongside the innate resilience and unique nature of the Euro, we may well see the single currency flourish and experience gains after an initial slump in response to the hike.

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Based in Saudi Arabia, Siraj has a strong understanding of and passion for accounting and finance. He has worked for international clients for many years on several projects related to the stock market, equity research and other business, accounting and finance related projects. Siraj is a published financial analyst on the world's leading websites including SeekingAlpha, TheStreet, MSN, and others.