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Rising Borrowing Costs Could Threaten US Economic Recovery and USD Rally

Economics / US Economy Mar 21, 2014 - 09:59 AM GMT

By: MahiFX

Economics

There's an inconvenient truth, which is that many western countries are so heavily indebted that they cannot afford rising interest rates, yet that is exactly what is starting to happen in the US and long before the US Federal Reserve tighten official rates.

Steadily rising interest rates should be supportive for USD as the Fed normalises its monetary policy. Yet the very process of winding down quantitative easing could be sowing the seeds for the next US economic downturn and a weaker USD. 


At Wednesday's FOMC Fed chairwoman Janet Yellen guided expectations on interest rates higher. They're now expected to be at least 1% by end 2015 if not sooner and 2.25% before end of 2016. That's unsettled the bond markets, which will feed through to higher borrowing costs for the whole economy if yields continue to rise.

Volatility as markets get used to Yellen

Q2 could be pivotal for USD

The US economy has been showing less vigour of late. That's being blamed on the harsh winter. But as the weather thaws into spring that line of thought will be tested. In theory then Q2 should see a pick-up in economic growth – but what if it doesn't?

The cost of credit will be a major factor for the recovery and if it rises too fast, interest-rate sensitive consumers (despite deleveraging) will rein in their spending and that will hurt the economy. Yellen may therefore have acted too soon in guiding interest rate expectations higher – after all the markets have only just digested the fact that quantitative easing is ending.

Therefore Q2 could be pivotal for the US economy, monetary policy and the strength of the USD. If growth picks up then there will be little change in the Fed's current monetary stance.

Signs of economic weakness could lead to forward guidance on interest rates being quickly revised down. Normally this would weaken USD, unless it triggers pandemonium on the world markets in which case the US currency will be a safe haven trade for a while.  

By Justin Pugsley, Markets Analyst MahiFX

http://mahifx.com

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About MahiFX

MahiFX is headed by David Cooney, former global co-head of currency options and e-FX trading at Barclays Capital and responsible for the award winning e-commerce platform BARX and Susan Cooney, former head of e-FX Institutional Sales in Europe for Barclays Capital. Operating as a market maker, MahiFX provides traders direct access to institutional level execution speeds and spreads through its proprietary-built fully automated pricing and risk management technology, lowering the cost of retail forex trading.

MahiFX global operations are headquartered in Christchurch, New Zealand with offices in London, UK with development and support teams in both locations for 24 hour service. The company is regulated by The Australian Securities and Investments Commission (ASIC), Australia’s corporate, markets and financial services regulator.

© 2014 Copyright MahiFX - All Rights Reserved

Disclaimer: This material is considered a public relations communication for general information purposes and does not contain, and should not be construed as containing, investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. MahiFX makes no representation and assumes no liability as to the accuracy or completeness of the information provided.

The use of MahiFX’s services must be based on your own research and advice, and no reliance should be placed on any information provided or comment made by any director, officer or employee of MahiFX. Any opinions expressed may be personal to the author, and may not reflect the opinions of MahiFX, and are subject to change without notice


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