The US Dollar has surged today, as the Federal Reserve announced that it will raise interest rates for only the second time since the global financial crisis.
The Federal Reserve slashed interest rates in 2008, following the financial crash, before raising rates last year for the first time in seven years to 0.25 per cent. Now, rates will be increased by 0.25 per cent to 0.5 per cent, as sentiment in the American economy is buoyed by the election of Donald Trump as the next President. Indeed, Trump is expected to step up spending and provide a significant financial stimulus to the country, building upon improving employment and inflation data.
As a result, the Federal Reserve has intimated that rates will increase several times in 2017, driving the US dollar to a 14-year high. The dollar index climbed to 102.62, reports Reuters, its highest since 2003.
The rise has implications for many markets around the world. Indeed, as traders moved to buy the dollar, traders sold off other currencies, leading to losses for the Australia, Canadian and New Zealand dollars, while the Mexican peso also weakened.
China’s yuan fell to its weakest level against the dollar in over eight years, reports The Guardian. The euro fell to a 21-month low against the US currency.
MPC holds #BankRate at 0.25%, maintains government bond purchases at £435bn and corporate bond purchases at £10bn. pic.twitter.com/mUcf8uYdRW
— Bank of England (@bankofengland) December 15, 2016
The pound is also seeing a knock-on effect, thanks to the Bank of England also announcing its own interest rate policy for the future. While the US is bullish in its outlook, the UK is about to enter a period of negotiation over its membership of the European Union. As a result, the Bank of England chose to hold its interest rate steady at 0.25 per cent, which it was lowered to in August, following June’s Brexit vote.
The Bank of England’s base rate is not expected to change for a couple of years, due to Brexit, marking a growing divergence in financial policy between the two major global players. Sharply rising swap rates, though, could see mortgage rates in the UK increase raegardless, as lenders pass on their costs to consumers. Sterling, meanwhile, fell almost two cents against the dollar to a low of $1.2509.
Pound falls against dollar after Bank of England's latest comments on inflation https://t.co/Eq1QZgQ145 pic.twitter.com/ajVdwWO5Fo
— Bloomberg Brexit (@Brexit) December 15, 2016
The dollar’s strength, which is likely to continue over the coming quarter and potentially further in 2017, will spur investment in overseas property from American buyers. Indeed, agents in France, Italy and the UK have reported US investors taking advantage of their spending power.