While some market watchers have been speculating that the Federal Reserve (Fed)will raise the federal funds rate at its meeting this month, the central bank is more likely to do what it did in September: nothing.
The Fed’s continued delay has repercussions for more than just the U.S. economy and markets. I believe it’s also likely to lead to more stimulus from the European Central Bank (ECB) and Bank of Japan (BoJ), which may ultimately support the case for stocks in Europe and Japan.
To understand why this is the case, here’s a little primer on the typical relationship between Fed rate increases and the dollar. When the Fed raises rates, the prices of dollar-denominated assets like U.S. Treasuries generally drop, while their yields correspondingly rise. In response, both foreign and domestic investors have tended to flock to these dollar-denominated assets, increasing demand for dollars, and leading to a stronger dollar.
In contrast, after the Fed’s September meeting, where the rate was left unchanged, the dollar dropped, and foreign currencies strengthened against the greenback, according to data accessible via Bloomberg.
This isn’t the scenario that economies with weaker currencies typically want. They want a stronger U.S. dollar to help fuel their economies. When their currencies are weaker than the dollar, their countries’ goods are less expensive for foreign customers, fueling exports and economic growth.