What is the relationship between interest rates and the Greenback or U.S. Dollar vis-a-vis other currencies?
Does the value of the dollar relative to other world Currencies (on average) appreciate or depreciate as interest rates (for example, LIBOR) go higher? Is the relationship between the Greenback's value and LIBOR rates in tandem directionally? Or is it an inverse relationship?
There is not a direct relation. Value of the dollar is based on amount of national debt and rates of inflation. Interest rates are used to control inflation but not the value of the dollar.
5 Responses to “What is the relationship between interest rates and the Greenback or U.S. Dollar vis-a-vis other currencies?”
There is not a direct relation. Value of the dollar is based on amount of national debt and rates of inflation. Interest rates are used to control inflation but not the value of the dollar.
Comment made on March 9th, 2009 at 2:43 amReferences :
Each country controls their own interest rates.
Money chases return, this means in a normal environment, money will flow to the currency with the best return, but to buy this currency bring in the law of supply and demand and a lot of money bidding for this currency make it appreciate against other currencies
Selling of a home currency to buy a foreign currency cause the home currency to depreciate and the foreign currency to appreciate.
Comment made on March 9th, 2009 at 3:16 amReferences :
The exchange rate of the U.S. dollar depends largely on the interest rate the U.S. pays on U.S. Bonds. People buy higher interest rate bonds. The U.S. has been lowering the interest rate they pay on U.S. Bonds so people buy Euro bonds for example.
Comment made on March 9th, 2009 at 3:24 amReferences :
It's somewhat complicated and self-correcting. In general, money will flow to the country with the greatest possible total return. As US interest rates decline, money will move to other countries with higher interest rates or expected rates of return. This causes the value of the dollar to fall and other currencies to rise versus the dollar as dollars are sold and the other currencies are purchased. The decrease in the value of the dollar causes the value of US investments (in the hands of foreigners) to fall which can lead foreigners to sell even more of their US investments. A falling dollar can lead to increased inflation here in the US as the cost of imports become more expensive. The Fed could combat this by raising US interest rates which could stem the decrease in the dollar. Also, US exports become more competitive versus their foreign competitors. As foreign currencies gain versus the dollar, then foreigners are able to purchase US assets at a lower cost (because their currency has appreciated), which means that at some point, foreign currency will be converted back into dollars to buy US assets when the expected return on those assets is greater than the return they can get in their own countries. The demand for dollars would cause the dollar to increase in value.
The answer does not just depend on one variable. Other countries have their own monetary policies and tax rates (not to mention other regulation) that influence currency flows and thus currency values. As for your question about the relationship between LIBOR and the US dollar, I'm sure you can find charts of each and overlay them to see what the relationship is. LIBOR is the rate that banks lend to each other, and I believe there is a US quoted LIBOR and a pound quote.
Comment made on March 9th, 2009 at 3:54 amReferences :
If the interest rate on dollars goes down relative to Euros, as it has been doing, then people will want to invest in Euros and get the higher rate. To do this, they will have to sell dollars and buy Euros, pushing the value of the Euro up relative to the dollar.
Of course there are other things changing, not just interest rates.
Comment made on March 9th, 2009 at 4:16 amReferences :
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