Hey all,
Quick question:
Currently reading about how, the Fed increasing interest rates will increase the attractiveness of dollar-denominated assets?
Can someone explain why this is and the concept?
If higher interest rates are hawkish, and decrease borrowing - then why would it increase the attractiveness of dollar-denominated assets?
Thanks so much.
This is a deeply complicated subject one better suited for a Clint answer.
This said the strength and weakness of a currency lies on its ability to replay a bond at certain rates. The US rate is high and attracts a lot of buyers/investors.
Countries including the US in theory uses this money finance there internal growth and service there debt obligations.
In Turn as we have a global economy with each countries growth from assets and resources which produce its ability to repay and sell (borrow) more bonds.
The assets called corporations doing business globally need currency of the country they have to repay for products purchased and sold, Thus the forex market. So intrinsically then the strength of a currency then becomes the traded value of which we trade on creating fluctuation of supply and demand.
While that is a way over simplified high altitude which I think is basically correct I have with my aging mind reduced it to the following for trading.
USD is king of the hill so DXY rules. I trade the USD cross for strength and weakness. If you check out Currency Index - Mataf bottom chart you can see this graphically. Also here at BP Dennis and ? run two very good forums on trading strength and weakness.
The quick answer is that the better the return (interest rate) then the more buyers there will be.
In todayâs market many will be non-US, so if they want the return then they have to sell their respective currency and buy USD.
The âquickâ part of the question is very relevant - trading robots that are ascribed as being AI will react on any hint of news or numbers that could possibly be construed as leading to an interest rate change - a comment from the Fed, a tweet from the Pres, an unexpected market number etc.
One other little thing about FA - it doesnât matter if the concept is correct insofar as economics are concerned, what matters is how price reacts - and generally it reacts so simply.
Right now the S&P is on the rise for the week close - so risk is on - all is well - check S&P today.
Oil is risk linked these last few months - risk on - so buy some liquid gold - check wti todayâŚ
So what about Gold - sell it, why buy gold when feeling risky? - check Gold today.
Hmmm⌠yen - the olden guys say that Japanese investors are cash rich, a nation of savers (savvy) and in times of risk on they sell their yen to buy the risk - check Usd/Jpy today.
And back to the âquickâ part - why the risk on today?
TOKYO, Jan 18 (Reuters) - Bank of Japan Governor Haruhiko Kuroda said he expected trade tensions between China and the United States to be resolved this year, a government official said at a key economic panel on Friday.
News! changes sentiment, it started yesterday with Presidential tweets and continued today with an FOMC speech.
mid, you are right, but mostly guys like to follow TA.
The risk thing I was pointing out for today was marked out on TA by this chart of the Nikkei - the arrow is 15hrs back from now:
The Artificial Intelligence picked up on this at what time?
By coincidence it was âŚ15 hours ago (live):
Is this an acronym or an actual news service?
Apologies, mostly Iâm not so good with words, I tend to imagine that everyone can see into my thinking.
I deal with AI on computers, even though Iâm not as young as I used to be 
The programmers on the Algos are afraid to take risks so they play it safe - do what the old guys always did.
Thank you for the reply
Thank you all so much for your replies, t really helped.
@midwest @peterma
Just want to confirm and make sure my thinking is right.
Hawkish monetary policy is when interest rates are increased and thatâs known as restrictive monetary policy. And then a question, if interest rates = more borrowing and economic growth, does that slow inflation and if so why?
So then dovish = lower interest rates = more inflation?
I thought inflation accompanied economic growth, such as higher interest rates, is that wrong?
If someone in my line of thinking is wrong, Iâd really appreciate a correction. Thanks so much
CuriousPips, we the human race produces more people and of course you can break that down by country we need more money brought into circulation and hereâs the rub it has to be backed by something. In our modern society that something is called debt and the good faith of the country government creating that debt or you might say the good people of that country/currency. This is all a spiraling effect which we call inflation.
So releasing to much new money (backed by debt) to fast cause growth inflation to little and we have stagflation.
Anyway thatâs the way I see it, mind you I am not any type of economist. When I first started trading forex all of two years ago I wanted to write some type of program that monitored the key commodities around the world and build the tecnicales nation by nation to predict the currency rate interaction and their are a few that have done this. However I am not getting any younger and decided that this project wasnât necessary that forex was controlled by the central banks no matter and trade/forex is controlled with in a very narrow range. Further the only reason forex trading works is because of the leverage offered to traders as the actual price moves very little daily.
Think like a small business - imagine that you are selling lots, buyers everywhere, so what is your temptation?
Simple, charge more and make more profit.
This is what happens in economic growth, lots of buyers (spenders) so prices rise (inflation).
CBâs then try to curtail this buying/spending by raising interest rates - thus if the buying/spending is on a credit card then it will cost more - hence curtailing the spending.
The only other way to curtail the spending is to reduce wages⌠thatâs beyond the remit of any central bank - this is the reason why wages growth is a leading indicator.
Always use current examples - check UK wages growth, then imagine the Brexit baloney resolved, then imagine what would happen to GBP:
But as always the market resides in the now.
There you go, 3 days later and the latest earnings numbers are released - as mentioned - an important leading indicator, see the immediate GBP effect today.
This post for guys learning FA in later weeks/months - check the link 2 posts back - (one week back from now).
See the little chart, see too the trend on earnings, then check the thread title.
Often you will read that FA is useless, itâs always priced in or that it is extremely complicated.
Check out my little post on why central banks change interest rates, then also why it is that the market will front load numbers like earnings.
Note too how much time a trader has to think about numbers - itâs not all hair trigger stuff, far from it:
Anyways, here how GBP played out against the dollar-asset - USD - since the numbers release (first arrow, Tuesday of this week):
Then figure how TA kicked in next day (my last post and time of second arrow):
Edit: remember that the market is like a child, it has a short attention span and lives in the now - next week likely to be different.
Peterma, I think todayâs big dollar black eye was due to the Euro great equityâs reports with even over shadow the S&P pushing the USD south and other north.
Your thoughts?
Aye Mid, not so much the stocks, Gold is the driver - âChinese gold demand for the Lunar New Yearâ - whether real or not itâs not a time to sell gold - check the daily - rising way earlier than stocks.
Interesting to note that GBP rose 2.5% against USD - Euro didnât make 1/2%. (this week close)
Then have a look at Eur/Gbp - that cross as usual is a good indicator of pound and euro strength on the day.
peterma, thank you for the insight! I do follow forex metals but only XAUUSD and XAGUSD.
The Chinese insert makes mucho cense.
