Low Fed Rates Could Fuel Dollar Rally
Some currency Analysts believe that the Federal Reserve’s recent decision to keep rates at record lows could fuel a dollar rally against the euro and the British pound throughout 2010. Normally low central bank rates are negative for currencies but experts believe if the Fed’s low rated help to promote growth in the US economy that outpaces the euro zone and the UK the dollar will attract save haven investors throughout 2010. Recent economic reports indicate that the US is recovering from the recession at a faster pace than the euro zone and Britain. Many expect commodity linked currencies to rally vs. the dollar as commodity prices rise. Commodity linked currencies include the Australian dollar, the New Zealand dollar and the Canadian dollar. All of these countries have already raised rates and all have commodity driven economies. More than a few currency experts believe that the Canadian dollar will achieve parity with the US dollar sometime this year.
Aussie at Three Week High
On March 29th the Aussie dollar gained in advance of a report expected to show a rise in retail sales. The Aussie hit a three week high and most experts believe the Australian central bank will raise rates to 4.25%. The S&P/GSCI Index of commodities gained 0.5% and is near the highest level since March 19th prompting a rally in commodity linked currencies. The Aussie dollar gained 0.4% on the greenback trading at 92.16 U.S. cents and gained 0.6% on the euro trading at A$1.46. The Japanese yen fell 0.5% vs. the Aussie and traded at 85.24 per Australian dollar. The Canadian dollar rose 0.7% to C$1.0196 per U.S. dollar and most expect the currency to hit parity with the US dollar by June 2010.
Australian Central Bank to Raise Rates
Benchmark rates in Australia are currently 4% and are 2.5% in New Zealand. Australia is also in the enviable position of being one of China’s biggest suppliers of raw materials. These rates compared to US rates near zero and 0.1% in Japan makes the higher yielding Aussie and Kiwi attractive to investors. Reserve Bank of Australia Governor Glenn Stevens said that rates may be increased soon to control inflation. Stevens also said, “It’s not wise to leave interest rates right down at rock bottom any longer than you need. It would be not doing people any favors to have a prolonged period of very low rates and then hammer them unexpectedly.” The Kiwi gained in advance of a government report that is expected to show that home building approvals rose in February.
Quick Forex Tip: Interbank fx trading determines pricing in all levels of currency markets. Spreads available to interbank traders are sharp and unavailable to outsiders. Interbank traders who can guarantee a large number of transactions for large amounts can demand a smaller spread between the bid and ask price. Unfortunately these same spreads are not available to the average investor making relatively small transactions. Thus, for the average investor to participate in interbank fx trading, s/he must do so through the use of a broker.
