If you have been watching events unfold with the US dollar, and its reactions to statements by Federal Reserve Chair Janet Yellen, you will no doubt have noticed that it has a tendency to alter its behavior when Federal Reserve Chair Janet Yellen or her likely successor Ben Bernanke makes pronouncements. Here is what you need to know.
The first thing to know is that interest rates for various types of financial instruments have decreased as they have risen over the last several years. This has given the markets the chance to raise some money, and so we have seen increasing profits for the stock market in terms of equity values.
Well, here is where the two worlds meet. The United States government has been doing away with all sorts of regulations as a way to reduce government spending. And we are seeing a resultant increase in the supply of US dollars as well as the quantity of financial instruments denominated in US dollars.
The next thing to know is that interest rates for US Treasury securities have remained relatively constant as they have been on a rise. However, they are not the same as they were prior to the government stimulus efforts of recent years.
If you will recall, Chair Yellen gave a speech at the Massachusetts Institute of Technology, which was entitled “Perspectives on the Role of Monetary Policy.” She said, “I will also argue that the central bank should be cautious about raising the federal funds rate during an economic expansion.” She further noted that a rising federal funds rate will not only put pressure on mortgage holders, but it will also cause the US dollar to depreciate.
In other words, if a market reacts to a Federal Reserve Chairman, and what he or she says, it is going to make the price of theUS dollar, and therefore it will rise, in order to compensate for the effect on the price of the currency. And, if the market does not react, the price of the currency will fall.
That is how markets work. They change their behavior in response to changes in supply and demand, and they are always trying to catch the eye of central bankers, even if they do not get the job they want. Yellen seems to have realized this, and as such, she may not raise interest rates anytime soon.
We have also seen a lot of comments from President Obama, and we saw that he pledged to add some additional stimulus measures in the form of tax cuts and government spending. With the US government is reaching its debt ceiling, the prospect of allowing the government to default on its obligations is very real, and with this being said, the president knows that he has to do something, but he wants to wait until the debt ceiling has been reached before he makes any drastic changes to the credit rating of the United States.
So, the current debate over whether the Federal Reserve Chair Yellen will raise interest rates, has already created a ripple effect on the value of the US dollar. It is one thing to get a raise from a Federal Reserve Chair, but it is another thing to see your currency drop. The last thing that Janet Yellen wants is for the dollar to increase in value; it is much better to prevent that from happening than to get a raise and then watch it plummet.
At the moment, the Fed Chair is going to talk about the economy and the performance of the US economy, which will have an effect on the value of the dollar. But, she cannot tell us what that effect will be, and thus it will be up to us, the investors, to figure out what that means, and if we are able to act in our own best interests, and in the best interests of the global economy as a whole, then we will do just that.
It is also not too early to start buying silver; and if the markets continue to behave as they have been, and Janet Yellen does not raise interest rates, we will all win, because, as a person who invests in the US dollar, I get a very nice double dividend; not only do I get profits for selling my American dollars into other currencies, but I also get the appreciation of the US dollar in exchange rates. for the money that I have invested.