The price of money affects everything financial. When the price
changes, so does everything else, including perceptions. Relationships
adjust, risk-reward dynamics move, and investors rethink, recalculate
and review.
Evolution on this plane usually moves at a snail's pace over a day or
two, only to reveal itself more fully in longer stretches, with the
repercussions rippling across asset classes, markets, and borders. So,
when the Federal Reserve raises interest rates for the 15th time in a
row, as it did on Tuesday, and the dollar reacts by slipping, you may
wonder what Mr. Market is thinking.
The U.S. Dollar Index is lower this morning, despite this week's
25-basis-point bump in Fed funds to 4.75%. In fact, the Dollar Index
is considerably lower than compared to mid-November, a moment in time
when Fed funds were a relatively slight 4.0%.
Higher interest rates and a falling dollar. What gives?
In theory, higher interest rates imply a stronger currency. In a
make-believe competitive world, with only those two variables de...
Source: http://www.capitalspectator.com/archives/2006/03/whats_next_for_1.html
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