Will Further Rate Hikes Support US Dollar’s Growth?
High interest rates make the currency more attractive, so it should be strengthened. But this does not always happen. The US dollar is trading near the lowest levels in three years, while the yield of US Treasuries is at a maximum of three and a half years. Correlations between interest rates and currencies are approaching the lowest levels in more than a decade. The ratio between the US dollar and some of its major competitors, in particular the euro, has been sharply declining since the third quarter of 2017 and earlier this year.
The world economy has been growing at the fastest pace for years and analysts expect that expansion in the United States will continue for another couple of years, at least given the additional financial incentives caused by recent tax cuts. But, despite the rebound in global growth, financial conditions around the world remain extremely free due to low borrowing costs, which helped develop the growing stock market.
The US Federal Reserve raised rates three times last year, and financial markets expect three rate hikes this year. But a 15 percent drop in the US dollar since early 2017 suggests that investors do not believe that interest rates have reached a level when they make US assets attractive on the basis of relative interest rates. Interest rates in the Eurozone were last raised in 2011, and many analysts do not expect rates to rise until at least next year.