The dollar is heading for its worst month this decade after Fed Chairman Janet Yellen reiterated that the Fed will move cautiously in raising interest rates. For the investors the question is, will a weaker dollar hurt stocks or help? Bloomberg Business writes about Yellen sending the dollar to its worst month since 2010.
The dollar headed for its worst month in 5 1/2 years after Federal Reserve Chair Janet Yellen doused speculation the U.S. central bank will pick up the pace of interest-rate increases. The yen strengthened.
A gauge of the greenback approached the lowest since June after Yellen said the Fed will act “cautiously” as it looks to raise rates against the backdrop of a deteriorating global economy. The dollar has fallen against all of its 31 major peers in March with Russia’s ruble and Brazil’s real posting the biggest gains, helping emerging-market currencies to their best month in 18 years.
The Fed sees itself as walking a narrow line with inflation on one side and recession on the other. Although the US economy is moving along the global picture is bleak, especially in emerging markets and China. Thus the Fed will proceed slowly in raising rates and the dollar will weaken a bit. Will a weaker dollar hurt stocks or help them?
Stocks Higher on News of Cautious Approach to Higher Rates
The stock market’s first response to Yellen’s speech was to go up. Reuters reports that Wall Street is higher on the news of a cautious approach to higher rates.
Wall Street was higher on Wednesday as investors took comfort from Federal Reserve Chair Janet Yellen’s comments that the central bank should tread cautiously on raising rates this year.
Global markets cheered Yellen’s remarks, which suggested that a rate hike was not immediately on the horizon. The dollar fell more than a percent, while bond prices rallied.
“Yellen’s comments allowed investors to breathe a sigh of relief that the Fed will not be raising rates in April,” said Sam Stovall, U.S. equity strategist at S&P Global Market Intelligence in New York.
Why are investors so pleased that rates are not going up in a hurry?
Interest Rates and Markets
Investopedia writes about how interest rates affect U.S. markets.
Changes in interest rates can have both positive and negative effects on the U.S. markets. When the Federal Reserve Board (the Fed) changes the rate at which banks borrow money, this has a ripple effect across the entire economy.
higher interest rates mean that consumers don’t have as much disposable income and must cut back on spending. When higher interest rates are coupled with increased lending standards, banks make fewer loans. This affects not only consumers, but also businesses and farmers, who cut back on spending for new equipment, thus slowing productivity or reducing the number of employees. The tighter lending standards mean that consumers will cut back on spending, and this will affect many businesses’ bottom lines. This will cause the businesses to reduce the number of employees that they have and to hold off on any major equipment purchases.
The bottom line is if interest rates go up too far and too fast they hurt the economy and by extension the stock market. It turns out that a weaker dollar will not hurt stocks at least in the short run. However, if the Fed waits too long and inflation takes hold that might be another story.