Thursday, September 19, 2013
Surprise Fed announcement causes dollar to weaken
The Fed's surprise announcement that they are going to keep printing money caused US ten year rates to fall from 2.9% to 2.7% in a matter of minutes. And the dollar fell. There are two obvious ways to think about the linkage. First, the carry trade means that the decline in US rates increases demand for borrowing in US dollars. These borrowers then sell dollars and buy foreign currencies to invest abroad. This drives down the dollar, relative to the foreign currency. Second, consider investment demand. As US interest rates decrease, demand from foreign investors falls (who had been selling, e.g., Euros to buy dollars to invest in the US). This drives down the dollar.