Dollar Strength vs. Weakening: Interest RatesUS Currency's Global Impact

The Federal Reserve has been rsing interest rates aggressively since March 2022 in order to mitigate the high inflation resulting from pandemic-induced economic conditions. This action has bolstered the strength of the US dollar agnst major global currencies like the euro and Japanese yen, allowing American tourists to enjoy increased purchasing power abroad.

According to forecasts by Federal officials, they expect interest rates to be cut once during 2024 and four more times in 2025. This could result in a weakening of the US dollar which may make future travel abroad more expensive for US citizens.

The relationship between interest rate policy and currency strength is fundamental here: A situation where US interest rates are higher than those in other countries ts to be dollar positive. This means that a stronger US dollar relative to foreign currencies benefits American tourists as they can afford more when traveling overseas. Conversely, falling interest rates t to lead to a weakening of the US dollar and make future trips abroad costlier for travelers.

While some financial experts anticipate the dollar's strength may ure, there are also predictions suggesting it could lose its value in the near future. For instance, Richard Madigan, from J.P. Morgan, notes that the European Central Bank cut interest rates recently while at the same time, the US Federal Reserve has kept interest rates higher than expected by many forecasters, resulting in a widening of the rate differential between the US and Europe.

Moreover, the current scenario where the US economy remns robust provides additional support for a strong dollar. A healthy US economy typically leads to higher economic growth or inflation expectations which increases the probability that the Federal Reserve will mntn high interest rates.

Additionally, US assets generally offer better returns when interest rates are high compared to other countries. For instance, an investor in Europe or Asia could potentially earn only 1 or 2 on their bank account holdings while earning 5 on similar holdings in the US. This could encourage them to shift some of their funds to the US, further boosting demand for US dollars.

It's important to note that these dynamics can also apply to emerging markets although currency fluctuations are typically more volatile due to factors such as political risks and commodity prices like oil.

Market Data Terms of Use and s

Data is provided by various sources including but not limited to financial institutions, market data vors, and public information providers. The accuracy and completeness of this data cannot be guaranteed and is subject to change without notice. The content in does not constitute investment advice or any other professional guidance. Users are encouraged to consult with their own financial advisors before making any decisions based on the information presented.

Licensing Reprints

CNBC complies with all relevant copyright laws and regulations, respecting intellectual property rights of its contributors and partners. Please contact us for licensing inquiries or if you wish to reproduce content from CNBC.

Privacy Policy

CA Notice
This article is reproduced from: https://www.cnbc.com/2024/07/10/why-the-fed-cutting-interest-rates-may-weaken-the-us-dollar.html

Please indicate when reprinting from: https://www.i477.com/foreign_exchange_RMB/Fed_Strong_Dollar_Policy_2024_25.html