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Can You Imagine The Fed Raising Rates In This World? Currency Crisis Edition

A month ago China’s stock bubble was bursting and Greece was imploding. Yet the US Fed, in a violation of both headline sentiment and common sense, was still promising to raise interest rates come September.

Fast forward to this week. China’s surprise currency devaluation has sent the global markets into a tailspin, but rather than spiking on the sudden drop in a major trading partner currency, the US dollar is plunging against the euro and most other currencies. Why? Because a global currency crisis is just about the last situation in which the world’s major central bank would be expected to tighten.

Suddenly, traders are concluding that maybe rates won’t rise after all:

Fallout from China’s yuan devaluation weakens dollar

(MarketWatch) – The dollar weakened against most of its emerging-markets and industrialized rivals Wednesday as investors fretted that China’s devaluation of the yuan could cause Federal Reserve officials to delay an expected increase in their benchmark interest rate.

The ICE U.S. Dollar index DXY, -1.16% , a measure of the dollar’s strength against a basket of six rival currencies, was down 1% to 95.9920.

China’s decision to let the yuan drop caused emerging-markets currencies in Asia and elsewhere to depreciate in sympathy, as some investors anticipated central banks around the world will shift to a more accommodative monetary policy. This would push the dollar even higher, which could cause the Federal Reserve to hold off on raising interest rates for fear that the dollar has become too much of a drag on U.S. economic growth.

“The China move on FX, rightly or wrongly, is being seen as something that’s muting the policy divergence theme,” said Josh O’Byrne, G-10 FX Strategist at Citigroup.

Speculators unwinding bets on emerging-markets currencies also helped push the dollar lower, as they bought back the euros and yen they had used to fund those trades, said Jane Foley, senior currency strategist at Rabobank.

The euro EURUSD, +1.3222% rose 1.4% to $1.1197 from $1.1044 late Tuesday in New York, while the dollar shed 1% against the yen USDJPY, -0.94% to trade at ¥123.88 down from ¥125.07 late Tuesday.

So now we have currency turmoil in the developing world, equity corrections and possibly bear markets in the developed world, and deflation pretty much everywhere. None of this argues for a stronger dollar or higher interest rates.

Even before the latest shock, the Fed was starting to accommodate this view by sending out talking heads to soften the September rate hike speculation. From MarketWatch over the weekend:

…But comments from Federal Reserve Vice Chairman Stanley Fischer on Monday may have helped ease some of those concerns. He told Bloomberg TV he doesn’t expect the first interest-rate hike by the U.S. central bank in more than nine years to occur until after inflation returns closer to the Fed’s target of around 2%.

Another week like this one and the idea of any central bank anywhere raising interest rates will be laughed out of the room.

30 thoughts on "Can You Imagine The Fed Raising Rates In This World? Currency Crisis Edition"

  1. I think they will pull out all stops and suspend contributions of social security and withholding for a period of time for a certain wage bracket in order to try and spur spending. It’s about the only thing they have left to raise the dead economy which will not work either. But they will postpone and delay to the last minute.

  2. The FED has the final say. The ONLY reason that they haven’t raise interest rates for nearly 7 years is that the economy SUCKS.

  3. Actually, the drop in the dollar is precisely what I would think would solidify a rate increase to keep it propped up. Evidently that makes too much sense so I suggest we all poor a tall one and sing along (to the tune of the Stones’ Gimme Shelter):

    Oh!, there’s a storm a threat’nin
    My very life today.
    If I don’t get some shelter
    Oh yeah, I’m gonna fade away.

    War, children, it’s just QE away
    War, children, it’s just QE away
    It’s just QE away!

    Ooh, see the Fed is sweepin’
    Our US markets today
    Buyin’ like a red hot trader
    Mad bull lost it’s way.

    War, retirees, it’s just QE away
    War, parents, it’s just QE away
    It’s just QE away!

    Devaluation is the objective
    But poverty is the way
    If you don’t get some shelter
    You are gonna fade away!

    War, investors, it’s just QE away

    War, pensioners, it’s just QE away
    It’s just QE away!

    The flood of US dollars
    Is threatnin’ my wealth today
    If I don’t get some precious metals
    I too am gonna fade away!

    1. I tell you what Fabian. I’ve gotta heluva more faith in Trump than any of these other punkinheads that are in office. NO doubt about that pal. LOL

      1. I was just being slightly sarcastic. I like Trump, he forces the candidates to talk about some issues they’d like to avoid.

    2. That CLOWN will run third party when he loses the nomination and if the GOP had any chance of beating Hillary they will not by the time he is done. Mrs. Clinton’s secret weapon…. Donald Trump.

      1. As I wrote I was being sarcastic, a bit. However there is one profound thing he said: we need a prez with energy. On this point he’s absolutely right and few candidates have the fire. Hillarious is not going to be prez. First, she doesn’t have the energy. Second Obama doesn’t like her and Biden was a very loyal and reliable VP. He will return the favor. Biden is a valid candidate (not that I will vote for him but if he’s prez I’m not going to move to Belize).

  4. Today, if anyone was watching we witnessed the power of the establishment algorithms in action. The market was in a total rout and then suddenly began surging upward as if there had been good news closing a 231 point decline in the course of about two hours . When there are no good headlines one must be manufactured.
    The point is , the Federal Reserve will act decisively to preserve this bubble as long as it can . There will be no rate increase this year and the rivers of free cash will continue to flow into the markets as they have been for years. For investors who really understand that value must be earned in the marketplace this is not good news and hastens the day when the preverbal piper must be paid for the maleficence of the FED.
    The DJIA would be somewhere in the 15,000 range had it not been for some cleverly timed algorithms and the mysterious ” technical glitch”.
    If you have money in this bubble my advice is get it as soon as possible. Nothing can be counted on from this point forward we’re entering very dangerous times.
    For the record I have taken my own advice here.

  5. We have so much malinvestment that Yellin should tighten. It should have been done 5 years ago! We need to normalize our interest rates. ZIRP is really, really bad for economic efficiency. ZIRP is a drug like heroin and the USA is an addict!

  6. They might raise rates!!

    “It was not accidental (1929 crash). It was a carefully contrived occurrence… The international bankers sought to bring about a condition of despair here so that they might emerge as rulers of us all.”
    Rep. Louis T.McFadden (D-PA)

  7. Yes, certainly. When I look at one particular chart then I see one particular trend that could FORCE the FED to raise rates in the VERY near future. Because the FED FOLLOWS the market !

  8. If you’re asking my opinion, I say there’s no chance of a Fed rate hike in September or even December. It was probably not going to happen as it was, but with the China currency devaluation the Fed would have to be suicidal to raise rates.

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