Now that the US central bank has increased interest rates in almost a decade, investors’ reaction has been one of relief.
The Fed Has Hiked Interest Rates. Here’s What it MeansThe interest rate hike sees the end of the long-running ‘zero interest rate policy’ era, which most investors had anticipated for over a year. Even then, market analysts and policy makers were keen to assert that the monetary contraction strategy would be gradual to mitigate the kind of panic that ensued following the termination of quantitative easing.
So far, going by the initial reactions from the markets it seems that the interest rate hike is seeing its first signs of success.
What do the rate hikes mean for forex traders?
Interest hikes primarily affect the currency markets. It is not always easy to predict the effects of such hikes on the market, but overall, changes in interest rates tend to trigger long-run market movement.
For example, say you are a European investor and you are able to obtain credit cheaply in German and purchase high-yield bonds in the US, then in effect, the dollar will rise against the European currency—the Euro.
At the start of the year, the US dollar was very strong against other currencies ahead of the interest rate hike. Throughout the year, the dollar has gained strength against emerging market currencies but the stronghold began to loosen up as the Japanese yen and the euro regained their strength.
In the coming years, it is expected the US dollar will retain its strength, as the Fed continues to gradually raise interest rates.
Which assets will be most affected by the interest rate hike?
While almost every asset will be impacted, some will be affected more than others will by the high interest rates. Stocks of listed companies should perform well given that higher rates signal stronger economic growth.
On the other hand, high interest rates usually have a negative impact on the bond market, with high rates resulting to low yields.