Posted by Oliver Meredew on November 16th, 2015.
For a longer time than anyone cares to remember, economists have been speculating on when the US Federal Reserve is likely to raise the interest rate. Such a decision is long overdue according to some investors, given that the last time the Federal Open Market Committee (FOMC) made any adjustment to the rate whatsoever was in late 2008.
Suffice it to say, with such a long history behind the decision, the Fed has a huge responsibility on its shoulders to time a rate hike so that it benefits, rather than burdens, the US economy.
The last available opportunity for the Fed to raise the interest rate this year will be on December 16th and at the time of writing, the odds were relatively equal over whether the day will end with a now-historic rate rise or yet another disappointing freeze.
However, if the Fed did decide to raise the interest rate in December, how would the subsequent strengthening of the US Dollar affect your business? The US Dollar is one of the most traded currencies in the world and as a consequence, a rate hike is likely to have a definitive international impact on both businesses and consumers, the specifics of which are detailed below.
If you operate a business within the United States that relies on importing materials or produce from outside the country, the situation is likely to improve as greater US Dollar strength will come with higher purchasing power. An added effect of this will be that imports from nations that use commodity and emerging-market currencies, such as Australia, Turkey and New Zealand will be additionally reduced in value, therefore allowing purchasers and importers to get more for their money. This doesn’t just stop at buying materials, however, as overseas investment will also become cheaper for holders of the boosted US currency.
If your company also exports from the US, income may grow as exporting goods will garner a higher profit due to the increased ‘Greenback’ value.
On the other hand, if your business is in tourism circumstances may worsen. This is due to foreign currency conversion getting travellers less US Dollars to spend in the country if their currency is weaker compared to the ‘Buck’. However, this is again a balancing act as US citizens or those who already possess the currency will be able to enjoy increased spending power within the country.
The greatest gains in the wake of a Fed interest rate hike will be seen by those that import into the US but sell those imports (or products created from them) domestically.
As much as central banks would like to have complete control over currency movements, these are to some extent self-regulating. Although a strong US Dollar would initially be of great benefit to those who were spending it, the situation would ultimately widen the US trade deficit which as an undesirable factor would gradually push the value back down.
At the other end of the scale, if the Fed refuses to buck the trend and keeps the rate at 0.25%, the US Dollar can be expected to soften considerably. Given that economists are not waiting for the ‘if’ but the ‘when’ of the Fed raising the rate, the effect of this outcome is likely to be only temporary, but for the immediate period after a rate freeze was announced, the US Dollar would likely plunge in value over false expectations on the part of investors
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