Dollar Weakens as Global Banks Hit Pause on Interest Rates

How do interest rates impact the value of a currency? Let’s review:

Higher rates mean higher borrowing costs, which usually make a currency more attractive to investors seeking higher yields than in other currencies. That’s exactly what happened to the U.S. dollar during 2014-2015 when we saw a dollar bull market built on expectations that the Federal Reserve would raise rates domestically while central banks around the globe would keep on lowering interest rates.

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However, the Fed is not hiking rates as fast as markets had expected. On top of that, there are many questions regarding the ability of banks in Europe and Japan to lower interest rates more from here. This caused the U.S. dollar to weaken this year, having a bullish effect on commodity markets and therefore, metal prices.

Japan Holds on Rates

Japanese Yen appreciates against the dollar
The Japanese yen appreciates against the U.S. dollar. Source: Yahoo! Finance.

The Bank of Japan kept interest rates unchanged last Thursday despite coming under pressure to take further action. The yen surged more than 3% against the U.S. dollar after the announcement, its biggest one-day gain since May 2010.

In January, Japan’s central bank surprised markets by setting the country’s first negative interest rates. The move pushed the dollar higher and the yen lower. However, this time we saw the opposite happen since markets expected Japan to continue to lower rates.

Some investors now think that the BOJ may be nearing the limits of what it can do to help the Japanese economy which could push up the yen’s value. However, the bank insisted that it would act at any time to ease policy if conditions require it, reckoning that there is still plenty of room to push down the negative rate. Japan’s next policy adjustment on rates will have a big impact on the dollar, and therefore commodity prices.

Europe Holds Rates

Euro appreciating against the dollar year to date
The euro appreciating against the dollar, on the year to date. Source: Yahoo! Finance.

Also in April, the European Central Bank left its policy mix unchanged. The ECB’s decision to stand pat on policy was widely expected since the central bank had already boosted its stimulus twice since December.

In March, the euro increased in value after the ECB said that it wouldn’t lower interest rates more, providing, instead, other stimulus measures including additional bond purchases and extremely cheap loans for banks. This time however, the bank reopened the door to fresh interest-rate cuts. What the ECB does from now with interest rates will have a big impact on the dollar and, therefore, on commodity prices.

Fed Leaves Interest Rates Unchanged

Dollar index falling and testing support levels
The U.S. dollar index falling and testing support levels. Source: MetalMiner analysis of

Meanwhile, Fed officials left interest rates unchanged at their meeting last week and remained ambiguous about raising rates in June given low domestic inflation and mixed global economic growth signals.

Two-Month Trial: Metal Buying Outlook

The Fed failing to raise rates is having a depreciating effect on the dollar. The dollar index has weakened since January, pushing commodity prices up. The index is now testing key support levels that, if broken, we could continue to see more bullish moves in industrial metals.

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