There is a widespread expectation among traders that the Fed will finally raise interest rates in 2015 after close to seven years at zero percent. This was fueled by a statement made by Vice Chairman William Dudley, who said that he hopes rates would increase this year. Since Dudley was previously considered as one of the members of the FOMC who were least likely to vote for a rate hike, analysts considered what he said as significant. However, this does not mean that an increase in rates is imminent but rather that this policy change is on the table for the Fed.
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So far, however, traders don’t seem to believe that a rate hike would take place until December at the earliest. In advance of a Fed Reserve meeting set on September 16-17, the value of the dollar remained at a three-week low, retreating from March’s twelve-year highs. Analysts believe that the slowing down of the Chinese economy would lead the Fed to reconsider any interest rate hikes. Disappointing economic numbers from China fueled concerns that its growth would slow down to less than seven percent in the third quarter. This would be the first time it would have fallen to below this level since the worst of the global financial crisis.
So what could happen to the dollar if there is a rate hike? There are some analysts who believe that there is actually a weak link between the weakening of the dollar and Fed rate hikes. The dollar actually reacts by continuing to follow the predominant price trend. Thus, if the dollar was already in a down cycle, then it would continue to go down no matter what the Fed does.
Traders who subscribe to this analysis think that even if the Fed hikes rates earlier than expected, any reaction from the dollar would be muted. However, since the dollar has already been going up in value since mid-2014, there is a possibility that it would rally if the Fed undertakes a rate hiking cycle. Thus, traders should simply look at the price trend of the dollar and base their analysis on this rather than expecting any strong reactions that would cause the greenback to go up or down.