The recent rate hike in the emergency funds rate by the Federal Reserve gets us thinking about higher rates and the dollar in Forex trading. The Europeans had been complaining about the low value of the dollar in the USD/EURO currency pair. So, what about higher interest rates and factors influencing the EURO/USD pair? A cheap dollar was encouraging Europeans to buy less expensive American goods and an expensive Euro was making European goods overly expensive in the USA. Forex trading the Euro took on a new face recently with the threat of debt default by the southern tier of European nations. Now the EURO may suffer another drop in relative value if the Federal Reserve keeps hiking rates. On the other hand a lower priced Euro could help industry on the continent and encourage tourism as summer approaches.
Higher US interest rates have two basic effects. They tend to slow down the growth of business because credit becomes more expensive and they attract foreign purchase of US debt in the form of Treasury Bills and other interest bearing investments because these become more profitable. Understanding these basic principles is important in understanding the Forex markets. The Federal Reserve has been hesitant to raise rates for fear of choking off the economic recovery before it really gets started. Many believe that Chairman Bernanke will always opt for economic growth instead of a strong dollar. The current Fed chairman wrote the book on how tightening credit instead of loosening it as a major cause of the Great Depression in his research over the years. The problem for the USA is inflation and a continual devaluation of the dollar. That is what rate hikes would be meant to remedy so long as they do not throw the country back into the depths of the recession.
Despite the new issue of higher rates and the dollar in Forex trading, the matter of Forex and sovereign debt still looms large. Economists, as well a bit of old Forex trading revisited, will show us that in the years after a severe economic decline, like the current recession, debt defaults and bankruptcies are common, even among nations. Countries pour resources into social support and job creation in the hope that a recovery will create more jobs and bring in more tax revenue. When these projections don’t work out and credit runs out, or maybe the presses printing money break, national bankruptcy threatens. The daily press may have moved on to the next bright and shiny piece of news, namely higher rates and the dollar in Forex trading, but Forex traders are still tuned in to how the European Community will bail out their failing members.
In the world of international currencies Forex trading and opinions go together, but Forex trading and results are what matter. Knowledge of a possible drop in the Euro because of bankruptcy by the PIIGS (Portugal, Ireland, Italy, Greece, Spain) or a heads up on likely higher rates and the dollar in Forex trading are of no use unless the trader uses this good Forex advice in his daily trading, developing Forex strategies and practicing scenarios to be ready for the swings in the USD/EURO currency pair that result from the above events.