It is hard to forecast the future, even with amazing software such as Eviews, Stata or Matlab it is hard to forecast the future of the currency. In this article we will focus on what happens to bond when there is a change in interest rates and what else could impact the strength of US dollars.
Impact of interest rates on Bond
When there is increase in interest rates there is an increase in demand for bond because it gives higher return. High return in bond can attract foreign investors to buy bond, when they want to buy bond then they will exchange their own currency to US dollars, which will increase in demand for USD. Usually bond is purchased a lot buy investment companies and banks. Bond is risk free asset therefore high return attracts so many investors. Increase in demand for US dollar will increase the value of US dollars, therefore it will be strong against other currencies. But that is not what is happening nowadays. The interest rates are really low which is 0.5 percent and US dollar is strong against other currencies, £1 is $1.44 and it is also strong against Euro.
Impact of supply in US dollar on exchange rate
The law of supply and demand states that an increase in supply reduces the price and reduce in supply increases the price. It is possible that there is reduction in supply of US dollars. Domestically, low interest rate attracts demand of money. When interest rates are low there are lot of people that wants to borrow money to finance their business or their houses. Low interest rates reduce the cost of financing, after 2008 crisis the US federal reserve bank reduced the interest rates so that people can start spending. Therefore an increase in demand locally will reduce the supply of money to rest of the world. It is less risky for the federal reserve bank to lend money locally than internationally because it reduces the risk of exchange rates.
According to the US treasury after 2008 2 year nominal rates have reduced below 1 percent, this is to increase the public spending. It is monitory policy to reduce interest rates to encourage people to spend more money. When people spends more money then it helps the economy to grow.