Wednesday, 16 December 2015

What could FED interest rate rise have on exchange rates?

Today it's widely expected that the US Federal Reserve will raise interest rates in the USA, the first major western economy to do so since the financial crisis of 2008. What affect could it have on exchange rates if they do? What might happen if they don't? I'll look at several scenarios in today's post, and also ways you can protect against the rate moving against you.

As it's widely expected that they will go ahead and raise rates, the US Dollar has been slowly gaining strength in recent months. As you can see from the chart below the rate has dropped by 6 cents in the last 3 months, from $1.56 to $1.50:


What will happen to exchange rates if the FED raise rates?


Logic would dictate that if they do raise rates, the USD would strengthen and rates would drop further. This is because the higher return would attract investors to the USD. However this may not be the case.... the last time they raised rates 10 years ago, the Dollar actually weakened against Sterling over a 2 year period, so this shows that it's not a given the USD will gain strength. It could be that the fact is already well priced into the market, and so if there are no surprises it may not have an effect on the rate. Also, there is a small chance they won't raise rates at all, and if this happens it would shock the market, weakening the Dollar and pushing rates back up again.

It's likely to be a volatile currency pair over the next 24 hours, but there are ways you can protect against the markets moving against you. Also, as the decision comes at 7pm when UK markets are closed, you should take steps to cover your position. You can use 'Stop Loss' and 'Limit Orders' to automatically secure a rate if it drops below a pre-agreed level, or rises to a particular target you're looking for. Alternatively you can remove your exposure completely by locking in a rate in advance of the decision. Even if your funds aren't ready, you can still fix a rate using a 'Forward Contract' if you have 10% of the total you want to convert.

Everyone's individual requirements are different of course, so if you have USD to buy or sell, and would like a quote from me or simply discuss your options, contact me today for a free consultation and get a quote to compare with your bank or existing broker. 

What about Pound/Euro rates?


GBP/EUR could also be affected today, as if investment is driven towards the US Dollar, then the Euro could weaken pushing Sterling/Euro up again after the recent drop. There's no way to predict what will happen of course, but there are various tools you can use to ensure you don't get a worse rate than is necessary.

If you need to get the best possible rates to buy or sell Euros, then contact me for a chat about what I can offer you. I provide exceptional rates of exchange for all major currency pairs, and getting a quote from me could save you thousands of Pounds. If you're buying or selling property abroad, or a business that needs to convert currency or pay for goods overseas, then get in touch. It's free, there's no obligation, and I usually have no problem at all providing significantly better rates than available through other sources.

Click here to get a free quote on your currency exchange.