If you agree, as we do, that current prevailing rates are a major factor in the value of a currency against its world peers, then as we stated in our first post, U.S. Dollar, Down and Out, or Not to Worry? (Part Two of A Series) different country mandates will have a major effect on the value of the currency. As countries begin to raise rates, again in our opinion, all other factors being equal the value of the currency will begin to rise against its peers, U.S. Dollar, Down and Out, or Not to Worry? (Part One of A Series).
Timing, most certainly will be different for different countries. Using the U.S. as an example, the recession has been hard and the government’s mandate may lead it to keep rates lower, longer, in order to stimulate growth, having an unintended consequence of the U.S. currency losing value against other countries as they raise their rates earlier in the economic cycle, see Australia’s surprise rate increase, and note the currency change http://www.marketwatch.com/story/australia-surprises-with-025-point-rate-increase-2009-10-05.
In a final “crisis related” thought, since we have a nice immediate historical review, the U.S., a large, well populated, growing country, that has established its self as a very strong World power. On a side note, see chart below, the currency of safety during the crisis; note how the U.S. Dollar rose extremely during a time of crisis, again in our opinion, showing it is the safe haven for today.
But what about longer term?
As Emerging and Developing countries gain footing in the world economy, and as the U.S. continues to age, it is not too hard to imagine a time where the U.S. will not be as dominate of a power as it is today. Power, for trading partners, lies with consumption and growth; therefore indirectly their currency. As the World gets smaller, and countries more equal, many currency safe havens and anchors may exist, for now, the U.S. Dollar seems to be acting in a more normal “prevailing interest rate” manner, again in our opinion.
Have a Good Day!