How Fed Cut Interest Rates Influence Global Markets

The decisions of the Federal Reserve on interest rates are shockwaves in financial markets across the globe. With the US rate being reduced, it becomes cheaper to borrow money and this will impact the currencies, stocks and commodities worldwide. This article describes the effects of fed cut interest rates (fed ลด อัตรา ดอกเบี้ย) in the international market outside of America. Knowing these relationships will assist traders to predict the direction of the market once the Fed announces.

The effect of Fed rate cuts on the global markets

US dollar weakens against other currencies

In case the Fed reduces the rates, it makes the holding of the US dollars less appealing since the investors receive lower returns. International investors sell dollars and purchase the currency of the nations that have high rates. The following are the currency market impacts of Fed rate cuts:

• Dollar selloff: When the rates are low, it will decrease the demand of the dollar which will push the currency down against the major peers.
• Euro and pound rally: In case the European central bank maintains the level of rates at a higher level, the euro and pound strengthen at the expense of the weaker dollar.
• Yen strength: Japanese yen tends to appreciate as investors roll back the carry trades financed with low US dollar.
• Commodity currencies rise: Australian, Canadian and New Zealand currency will be advantaged with lower greenback and increased commodity prices.

Commodity prices increase

A depreciated dollar will make commodities costing in dollars less expensive to the foreign consumers and this will increase demand. The low rates are also an indication of the stimulus in the economy, increasing the hopes of increasing the consumption of resources. The following are the effects of Fed rate cuts on the commodity market:

• Gold rallies: Gold being a dollar hedge, a non yielding asset, is a beneficiary of a weak dollar, as well as a low rate.
• Copper and industrial metals gain: Reduction in rates is an indicator of infrastructure investments, which inflate prices of metals employed in the building industry.
• Agricultural commodities lift: The lower the dollar, the cheaper farm products of the US are to foreign consumers, and demand rises.
• Silver follows gold: Silver precious metal is following gold but it is also enjoying the industrial demand prospects.

Stock markets rally globally

Lower borrowing rates will give more appeal to stocks as compared to bonds which will push the money towards equities. The rate cuts of the US tend to instigate the stock market rallies in the global market. The following are the impacts on Fed rate cuts on the stock markets:

• US stocks lead: American equities are first to take off, with technology and growth stocks the greatest beneficiaries of the decreased rates.
• European markets follow: European stocks increase when the weaker dollar increases the earnings of the export oriented companies.
• Dividend stocks gain: The declining rates will make dividend-yielding stocks more appealing compared to bonds and will cause utility and real estate stocks to climb.
• Growth stocks benefit: Lower discount rates enhance the value of future earnings raising technology and biotech shares.

Frequently asked questions

Are Fed rate cuts a sure way of weakening the dollar?

Normally yes, though there is a possibility that, in the event that other central banks lower the rates even further, the dollar would continue to appreciate.

What is the rate of market response to reduction of rates?

Moves in currency and bond markets take place in seconds; commodity and stock reactions take place over hours to days.

Are all the markets across the world heading in the same direction?

As a rule yes on risk assets, but safe-haven currencies such as the yen and Swiss franc may diverge.

Conclusion

Reduction in Fed rates undermines the US dollar, improves the world stock markets and commodity prices. The interrelationships of these effects imply that a single Fed action provides trading opportunities in the currencies, equities, bonds, and commodities. The traders that are aware of such relationships can place themselves in front of, or just after the Fed announcements.