if fed keeps raising interest rates, does it mean the usd will keep getting stronger against other economies or currencies?
The dollar is strong because the US economy is healthier than those of many other countries and because the Federal Reserve keeps raising interest rates.
This doesn’t answer the question
Will the increase in interest rates always mean appreciation in USD?
Based on my knowledge, increasing the interest rates is just a measure to tackle inflation. And inflation leads to a fall in value of any currency. So, tackling this inflation will automatically strengthen the currency and in this case USD.
Now to talk further about how interest rate hikes help in lowering inflation rates, rise interest rates attract foreign investments to the economy. It is the same as how we would deposit our money to a bank that pays higher interest on deposit. And when more people start making investments in this currency, the demand for the currency will go up. And if you have studied a bit of economics, then you would already know that demand and price are positively correlated. Increase in demand = increase in price. Here the price is the exchange rate. So, increasing interest rates definitely leads to appreciation of USD in the end. But this will happen only if the inflation rates come down as expected by the Fed Reserve.
PS: I have written in my own words. So feel free to correct me if you see any mistakes. Hope this helps
That’s great and I agree with you. However, is it possible, maybe a specific situation where the increase in interest rates could cause depreciation?
@r7nga Yes, and that happens when there is a recession taking place. And experts think that we are nearing a state of recession for not just the US but on a global level. The EU is already in a very bad situation. It is kind of a cycle which is unavoidable.
A recession is most likely to happen when there are continuous interest rate hikes taking place to deal with the inflation.
Generally speaking raising interest rates to tackle inflation should boost the strength of any currency. That it is only really doing so to the USD tells you something about the state of the world economy.
Do you mean that with other currencies raising interest rates actualy weakens their currency?
No not at all. It shouldn’t but it hasn’t strengthened them either vs how the USD has reacted to it. Speaks volumes about the global economic sentiment at the moment.
Well, all currencies are compared against USD. So, when the value of USD rises, there is an equal and opposite reaction happening like in Newton’s theory. Means other currencies may fall in value despite hiking interest rates.The only exception would be if their economy is prospering which would ultimately mean the currency appreciating in value. But as of now all major economies are under the clutches of global inflation and energy crisis. Perfect example would be Europe. And that’s why the rate hikes by the ECB are not helping much for the appreciation of the Euro against the USD. But yeah, now finally the Euro area inflation is declining. So, I think we can expect good things for the Euro in 2023.