Question

Discuss the relationship between Federal Reserve Bank’s interest rate policy and U.S. dollar movements

Answer 1

Generally, any increase in the interest rates should ordinarily push up the value of the currency relative to another currency with lower interest rates, since placing deposits in this currency would be incrementally profitable to depositors/investors due to the increased interest rates.

However, inflation, when introduced in the mix tends to complicate things. If interest rates go up, inflation would be up as well in most cases. Higher inflation decreases the value of a currency relative to another currency with lower inflation.

Also, since the USD is used as a reserve currency by most economies & is generally considered to be a safe haven, it tends to retain a steady exchange rate.

Hope that helped clear your doubts!