The US dollar is trying to rebound from the lows of 155.15 during the European session, although it is still capped under the 155.35 level so far. The Japanese yen outperformed its counterparts on Monday after statements by Bank of Japan Governor Kazuho Ueda hinting at raising interest rates in the coming months.
The BOJ will consider the “pros and cons” of raising interest rates at its next monetary policy meeting scheduled for Dec. 18-19, Ueda said earlier Monday. This is the strongest hint of a monetary tightening move this year and has sent Japanese government bonds higher, taking the yen higher with them.
Yen intervention looms
Moreover, Japanese Finance Minister Satsuki Katayama noted in a television interview that the erratic yen fluctuations he has witnessed recently do not respond to fundamentals. Katayama reiterated the possibility of currency intervention to deal with excessive volatility and speculative movements, providing additional support to the yen.
In the United States, by contrast, recent macroeconomic data and dovish comments by Fed officials have reinforced expectations of further monetary easing by the Fed. Futures markets are pricing in an 85% chance of a 25 basis point cut next week, according to CME Group’s Fedwatch tool.
Moreover, White House economic adviser Kevin Hassett has emerged as best placed to replace Fed Chairman Jerome Powell. Hassett has called for the need for easier monetary policy and is expected to reduce borrowing costs further next year. With most of the world’s major central banks nearing the end of their easing cycle, and the Bank of Japan gradually tightening interest rates, the US dollar faces serious headwinds.
Frequently asked questions about interest rates
Interest rates are charged by financial institutions on loans made to borrowers and are paid as interest to savers and depositors. They are affected by base lending rates, which are set by central banks in response to changes in the economy. Central banks typically have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below the target, the central bank may lower key lending rates, with the aim of stimulating lending and boosting the economy. If inflation rises significantly above 2%, this usually results in the central bank raising key lending rates in an attempt to reduce inflation.
Higher interest rates generally help strengthen a country’s currency because they make it a more attractive place for global investors to put their money.
High interest rates generally affect the price of gold because they increase the opportunity cost of holding gold rather than investing in interest-bearing assets or putting cash in the bank. If interest rates are high this usually causes the price of the US dollar (USD) to rise, and since gold is priced in dollars, this has the effect of lowering the price of gold.
The federal funds rate is the overnight interest rate at which U.S. banks lend to each other. It is the key rate that is frequently set by the Federal Reserve at FOMC meetings. It is set as a range, for example 4.75%-5.00%, although the upper limit (in this case 5.00%) is the quoted figure. Market expectations of the future federal funds rate are tracked by the CME FedWatch tool, which maps how many financial markets will behave in anticipation of the Federal Reserve’s future monetary policy decisions.
