The Thai Baht

[JimboPSM]

Fed interest rate movements and the value of the USD

There is a generally perceived “conventional wisdom” that an increase in the central bank interest rate of a country will result in an increased exchange rate and that a decrease in the central bank interest rate will result in a decreased exchange rate - with the impact often lasting for some months (these days however, the impact may only last a matter of minutes).

In the good old days of the last century it was rare for the interval between interest rate changes to be less than six months as it took at least six months for an interest rate change to not only work its way through the economy and change business and consumer behaviour, but to do so in a way where its impact could be measured with a reasonable degree of confidence.

As with many things in life the “conventional wisdom” is an oversimplification of something that is rather more complex - there are actually quite a number of factors that affect exchange rates and the interest rate happens to be the one that people are consciously most aware of.

On occasion these other factors can have a far greater impact than interest rate changes, IMHO the most common of which are (in alphabetic order):

• • Balance of payments
  • Employment
  • GDP growth
  • Government budget deficit / debt
  • Inflation
  • Market confidence
  • Market speculation

To give some insight into some of those other factors here are links to a few sites that give explanations of their views on the factors they consider to most affect exchange rates:

• CompareRemit
  https://www.compareremit.com/money-tran ... nge-rates/
  
  OandA
  https://www.oanda.com/forex-trading/lea ... ange-rates
  
  EconomicsHelp:
  http://www.economicshelp.org/macroecono ... fluencing/
  
  Tutor2u:
  https://www.tutor2u.net/economics/refer ... ncy-values
  
  Investopedia:
  http://www.investopedia.com/articles/ba ... 050704.asp
  
  Note: The list above all came from the top of a Google search (it is not an endorsement of any products the sites include).

It should be noted that, in addition to the above, we have entered an era where at least one new, and extremely unconventional factor, is now affecting the USD exchange rates in a bigly way.

This has been the willingness of turkeys to vote for Christmas (it had been thought that this rabid mental disease had been confined to the Little Englander breed of turkey, sadly a disturbingly large part of the US became similarly infected) – all of which brings me to the performance of the USD since 8th November 2016.

Although the USD/THB rate has not, over the last few years, been the best measure of performance of the USD it is something which, as many members are familiar with, is probably a reasonable place to start.

These are charts for the USD/THB rate from 8th November 2016 to 4th August 2017 in nominal and percentage terms; visually they show when and at what exchange rate the three Fed interest rate increases occurred – see pink scope sights:

• USD/THB rate movement

  

• USD/THB rate movement as a percentage

  

My preferred measure for the international value of the USD is US Dollar Index DTWEXM - these are charts for DTWEXM from 8th November 2016 to 28th July 2017 in nominal and percentage terms, visually they show when and at what value the three Fed interest rate increases occurred – see pink scope sights):

• US Dollar Index DTWEXM movement
  

  

• US Dollar Index DTWEXM movement as a percentage

  

  
  NB: the US Dollar Index charts are for one week less than the USD/THB charts as the availability of data is over a week in arrears.