The Interest Rate Paradox

The U.S. dollar has increased in value dramatically the latest year against almost all currencies, most spectacularily against the Ukrainian hryvnia and the Russian rouble, but most importantly very dramatically against the world’s second most important currency, the euro, which has dropped from about $1.4 a year ago to just $1.06 now, the lowest level in 12 years,

This reflects in part the fact that the ECB has successfully tried to lower the euro through QE, in part the fact that the Fed has ended its QE as the U.S. economy has become stronger and is expected by some to in fact start raising short term interest rates later this year. Ironically however, the dollar rally that this expectation has helped fuel might just prevent it from happening as it has a deflationary effect on the U.S. economy, thus perhaps convincing the Fed that such rate hikes aren’t necessary.

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