The US dollar rose significantly against other major currencies on Wednesday, after the US Federal Reserve announced a widely expected rate cut. The decision by the Fed’s Monetary Policy Committee came at a sensitive time, as the bank indicated that it would slow the pace of monetary policy easing in the future. The move could be a sign that the U.S. central bank believes the domestic economy is starting to stabilize considerably, following a series of measures it has taken to combat inflation.
The rate cut decision, which came with a quarter of a percentage point cut to the range of 4.25% to 4.50%, had a significant impact on financial markets. This decision is a signal that the Federal Reserve is ready to gradually reduce the interest rate after raising it in previous periods with the aim of controlling inflation. Through the move, bank officials have stressed that they will likely halt the rate cut next year if the labor market remains stable and there is no significant decline in inflation. This signal contributes to expectations that the US economy may have weathered the worst periods of inflation, leading to a slowdown in expansionary monetary policy.
This decision had an immediate impact on the movement of the dollar. The dollar has risen significantly against other major currencies, including the euro, Japanese yen and Swiss franc. In this context, the dollar rose by 0.72% against the Swiss franc, to 0.89895, a significant rise in volatile trading. This increase reflects a state of optimism among investors that the US central bank is on the right track in stabilizing the economy, which makes the dollar more attractive as an investment currency in this period.
The impact of the US interest rate on currencies
The expected US interest rate cut has direct effects on global currencies, as the US dollar is one of the main drivers in financial markets. When the Federal Reserve cuts interest rates, the return on dollar-denominated financial assets falls, reducing its attractiveness to investors looking for higher returns. This often leads to the dollar weakening against other currencies, especially those belonging to economies with tighter monetary policies.
When the dollar weakens, rival currencies such as the euro, yen, and pound sterling may benefit from it in the short term. The depreciation of the dollar makes U.S. products and services relatively cheaper for importers, which may boost U.S. exports but weaken the competitiveness of other export-dependent countries. This decline could create pressure on other central banks to reassess their monetary policies to keep their economies stable.
At the same time, a rate cut increases liquidity in the market, which could boost demand for higher-yielding currencies in emerging markets. Investors may turn to these markets for better investment opportunities, leading to an appreciation of emerging market currencies against the dollar. Expectations of a US rate cut have a strong psychological impact on the markets, as traders begin to reassess their investment strategies based on these expectations.
On the other hand, the impact of a rate cut may not always be negative on the dollar, as it depends on other factors such as the overall economic situation of the United States and the amount of the cut. If the U.S. economy shows signs of resilience and continued growth, the impact of the cut on the dollar may be limited.
The effect of the dollar rate on the financial market
Dollar price movements significantly affect global financial markets, as the world’s main reserve currency and a major instrument of international trade. When the price of the dollar changes, it is reflected in many financial assets including stocks, bonds, other currencies, and commodities. Dollar movements are often the result of the outlook of the US economy and the monetary policies of the Federal Reserve, which makes them the focus of market attention.
If the dollar rises, it could cause other currencies to depreciate against it, such as the euro, yen and pound. If this happens, goods and services produced in the United States may become more expensive for foreign consumers, reducing demand for U.S. exports. This may reflect negatively on the profits of American multinationals that rely on foreign markets. In stock markets, a stronger dollar could lower shares of companies that rely heavily on trade International.
On the other hand, when the dollar falls, U.S. goods become more competitive in global markets, increasing export demand. This may contribute to the profits of U.S. companies, especially those that rely on exports, and thus could lead to higher stock markets. A weaker dollar also enhances the competitiveness of other countries that export their products to the United States, contributing to an increase in their exports.
The impact of dollar price movements also extends to bond markets. When the dollar rises as a result of higher US yields, it may lead to lower US bond prices, as the yield on bonds becomes less attractive compared to other investments. In contrast, when the dollar falls, the yield on US bonds may become more attractive to foreign investors, leading to increased demand for them.
