Interest rates are moving up and so is the dollar against a few currencies. What does it mean for US stocks?
One thing that’s gone up with US interest rates is the US dollar.
As the theory goes, when yields on dollar-denominated assets go up, some foreign investors decide they’d rather hold some more of their wealth in the US greenback than other currencies. To put it another way, if an American bank account is now paying a little more in interest, you can expect a few more people wanting to have some money in the bank. They’ll need US dollars to do it.
So, when interest rates moved up recently, the demand for US dollars went up a little bit, too. Over the past 3 days, yields on the US 10-Year Treasury note have gone from just under 2.8% to 2.9%. Meanwhile, the US Dollar Index – a basket of foreign currencies versus the US dollar – has gone up 0.2%.
Of course the relationship doesn’t always hold, especially in the short run. But, stretch out the time frame and you’ll see some relationship. Over the past decade, yields on the US 10-year have fallen from about 4.5% to below 3%. At one point, they were nearly 1.6%. During that time, the US dollar index has fallen 17.5%. Over the course of 20 years, interest rates were cut in half while the dollar is one-eighth less than it was in 1993 compared to other currencies.
But, the dollar index is composed of the major currencies of the European Union, Japan, the UK, Canada, Sweden, and Switzerland. Other currencies have been rapidly devaluing against the US dollar over past three months, notably currencies of Brazil (down 19%), India (down 16%), Indonesia (down 11%) and Australia (down 7%).
(Read: Is the rupee ‘out of control’?)
What’s causing the recent upticks in interest rates and the dollar? The biggest culprit is the Federal Reserve Bank.
Since May, the market has been concerned with the Fed tapering its $85 billion per month bond-buying program (known as “quantitative easing”). Traders have been selling US bonds, thus driving up interest rates. Less stable currencies have a tougher time enticing investors to stay, leading to a major selloff in minor currencies.
So, what does that mean for the dollar going forward and what else can help it move higher? We talk numbers with Blaze Tankersley, Senior Managing Direct at BayCrest Partners, on the technicals. On the fundamentals is Steve Cortes, founder of Veracruz TJM. Tankersley and Cortes analyze what’s next for the dollar.
To see Tankerly and Cortes analyzes the US dollar, watch the video above.