World Interest Rates
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World interest rates offer an insight into the condition of the global economy. Low interest rates encourage domestic investment, productivity and commerce. As of November 2009, the interest rates of major economies in the world, except Australia, are less than 1%. This is a clear indication that the large economies of the world are focusing on enhancing their own domestic economic conditions. The world interest rates can also affect the value of their currencies against others. For example, if the interest rates in the US are higher than other major countries, non-US companies and individual investors would like to invest in the US to earn higher returns. As a result, the demand for the US dollar will go up with a rise in the value of the US dollar. On the other hand, if the interest rate in the US is lower than that of other countries, the value of the US dollar will go down.[br]
World Interest Rates – The US
If the US does not increase its interest rates, it will hurt the US dollar. Investors may prefer the currencies of other countries that offer higher yield. Australia has recently raised its interest rate to 3.25%, and might opt for another rate hike going forward. Since the unemployment rate is declining, Australia is expected to raise its interest rates further in the next meeting. However, the interest rate in the US stands at only 0.25%. If the US government wants its currency to do well, it has to raise the interest rate. The markets believe that the US will not raise its rates in the short term because the country is focusing on its domestic economy. The Fed Chairman also hinted recently that the US is likely to focus on monetary policy measures to strengthen its currency. However, he also reaffirmed that the country will retain its rates at near-zero levels to support the domestic economy.[br]
World Interest Rates – Future Direction
The weakness in the US dollar is pushing the gold prices and the Australian dollar up. Gold prices are rising because investing in gold is considered to be a hedge against the weak US dollar and inflation. However, the US government will take some monetary measures, if not interest rate hikes, to boost its currency. The markets believe that the Fed will raise the interest rates soon and the Eurozone countries will follow suit.
