Summarize the contents of the article using your concept map.
Interest rates impact U.S. exchange rate
The Federal Reserve has put the brakes on interest rate rises. And it did so even though it strong - and in December had signaled further interest rate rises for 2019.
raised interest rates four times in 2018 — a year in which the dollar's exchange rate was extremely But in its most recent monetary policy announcement, the Fed left rates unchanged. As interest rates and exchange rates tend to rise and fall together, the Fed's decision could mean the end of the strong dollar — and raise questions about the implications for U.S. businesses in 2019.

When the Fed raises interest rates, investors looking for returns tend to sell assets denominated in foreign currencies and buy dollar-denominated assets. The wider the spread between
U., interest rates and interest rates in other countries, the more investors are likely to move from foreign-denominated to dollar-denominated assets. In order to purchase dollar-denominated as-sets, investors need dollars. So, they exchange other currencies for dollars, and their increased demand for dollars raises the dollar exchange rate. Conversely, when the Fed cuts interest rates, investors sell dollar-denominated assets and buy foreign assets, which tends to weaken the dollar's exchange rate. Thus, U.S. interest rates and exchange rates tend to rise and fall in tandem.
The Fed's interest rate decisions also influence the interest rate decisions of other central banks, but in the opposite direction. When the Fed raises rates, strengthening the dollar, the currency exchange rates of other countries tend to weaken. This raises the prices of imports to those countries, pushing up inflation. If imports are generally priced in U.S. dollars, as is typically the case for developing countries, a falling currency exchange rate can also make it difficult for companies and governments to service dollar-denominated debt. So central banks, particularly in developing countries, may decide to support their currency exchange rates by raising interest rates in parallel with the Fed to negate the effect of the Fed's actions.
Hence, when the Fed cuts interest rates, the currency exchange rates of other countries tend to strengthen, hampering their export businesses. Central banks in those countries may choose to cut interest rates in line with the Fed rather than accept weaker exports.
Thus, the Fed's interest rate decisions affect the dollar's exchange rate, and the dollar's exchange rate can influence interest rate decisions in other countries.
Rising interest rates have been driving the dollar exchange rate up for the past year. The strong dollar has worsened terms of trade for American exporters, which is reflected in a widening U.S. trade deficit. But perhaps more importantly, the rising cost of dollars for international businesses has negatively affected the global economy. Several developing countries have experienced FX crises due to the strong dollar, and in the fourth quarter of 2018 both China and the Eurozone weakened economically. The International Monetary Fund (IMF) says it expects global growth to slow in 2019.
When the dollar's exchange rate rises, banks can become reluctant to lend for trade finance because of the cost of funding in dollars. This can make it difficult for international businesses to access the working capital they need to pay foreign suppliers. As a result, they may shrink their supply chains and reduce their trade volumes. Additionally, a strong dollar may raise credit risks for American businesses with international customers. So, a rising dollar exchange rate can mean that global trade shrinks, with negative implications for global growth.
A weaker dollar can reduce international businesses' credit risks and make dollar funding easier and cheaper to obtain. This can help them to expand internationally and develop their supply chains. A weaker dollar can also encourage investment in developing countries and improve the terms of trade of commodity exporters. All of this tends to increase both global trade and global economic growth.
So much for the Federal Reserve killing the US dollar. When Fed chair Jerome Powell signaled last month that rate hikes probably won't happen anytime soon, many experts thought that would hurt the dollar. Powell said the central bank needed to be "patient" and see what happens next for the US economy.
True, low interest rates usually go hand in hand with a weaker currency. Think of Japan and the yen during its lost decades of negative rates, deflation and a sluggish economy. But the US Dollar Index has rallied 1.5% against other currencies after the Fed's January 30
meeting. That has taken many by surprise.
An increase of 1.5% may not sound like a lot, but it's actually a fairly dramatic move in the usually sleepy world of currencies. The dollar is now up slightly year-to-date.
If the US economy remains healthier than most other major developed and developing coun tries, the dollar may continue to be the "cleanest dirty shirt."
"It's not a question of people flocking to the dollar because they want to. It's that the data from Europe and China and elsewhere has just gotten markedly worse," said Boris Schlossberg, managing director of FX Strategy at BK Asset Management.
Файл не выбран
Ещё