Sergio Bernales wrote:Okay, the sol is hitting 3.45 to the dollar. Looks like 3.5 is in sight. My thought is maybe it should start to stabilise around now that there has been an interest rate hike in the US, but with all the instability in the world economy, we might be looking at 3.60 or 3.70... good for US tourists and those whose income is dollars.
Interest rate hikes only make the Dollar stronger,not weaker. The real reason for Dollar strength is the lower price of oil. The lower oil goes, the higher the Dollar.
Well, of course it's true that higher interest rate usually support a currency or can push its exchange rate higher, but market sentiment often has a much bigger effect. I'd have thought the ending of quantitative easing in late 2014 was probably the single biggest factors in the dollar's rise. If you chart the dollar's exchange rate against a basket of currencies from the Fed announcement, the dollar's rise pretty much starts then. In the US, the recent interest rate rise was expected, so the dollar had already risen substantially. Its rise since interest rates went up hasn't been particularly impressive. http://www.bloombergview.com/quicktake/ ... asing-tapehttp://www.jdavidstein.com/currency-exchange.htmlhttp://money.cnn.com/2014/09/29/investi ... year-high/
If the market expects another rise in US interest rates, then the dollar will start to rise long before interest rates do, as long as investors expect the economy to grow strongly, or if they expect the rest of the world to do even worse than the States. This is another factor in dollar strength, turbulence in the world economy. As the world reserve currency, the dollar is a safe haven for difficult times. The eurozone is fragile, China is in trouble, many other emerging economies, like Brazil, South Africa, Turkey, are in trouble. So naturally investors looks for a safe place to park their money, the US, which in turn pushes up the currency.
As for the low price of oil making the dollar stronger, it can do, but the relationship is no longer causal. In effect, what happened in the past is the low price of oil made gasoline cheaper for US consumers and businesses that use a lot of fuel, such as transport, so this gave consumers more disposable income to spend on other goods and services which would then help the economy, while it also created savings for businesses that used lots of fuel, meaning they could give higher payouts to investors, or invest more. The US also imported lots of its oil, a low oil price meant spending a lot less on imports and so a virtuous circle.
However, recently there's a lot of evidence that after the financial crisis and the boom in shale oil production, the persistent low oil price could potentially seriously damage the US economy, as large chunks of US manufacturing is now involved in the oil industry. Moreover, many big banks have lent tens of billions to the industry and as so much money has been invested by business that the effect on their balance sheets could infect other areas of activity. Also as America is now a large producer of oil, the benefits of a lower price are less than for those countries that are big importers of oil, such as India, which has greatly benefited from the recent price falls. The articles below sum it up really well.
"At the start of 2015, JPMorgan, a bank, reckoned that cheap oil would boost GDP by around 0.7%—a boost to consumers’ purchasing power equivalent to 1% of GDP, offset by a smaller drag from weaker oil-industry investment. It now reckons the outcome was between a contraction of 0.3% and a boost of a measly 0.1%. Consumers may have saved more of the windfall than had seemed likely and the share of oil-related capital spending in total business investment in America, which had steadily risen for years, has fallen by half."
"As prices have tumbled, so has investment. Projects worth $380 billion have been put on hold. In America spending on fixed assets in the oil industry has fallen by half from its peak. The poison has spread: the purchasing managers’ index for December, of 48.2, registered an accelerating contraction across the whole of American manufacturing."http://www.economist.com/news/leaders/2 ... raid-cheaphttp://www.economist.com/news/briefing/ ... bal-growth