Yesterday the Fed increased the interest rate of the Dollar yet it's value decreased against various currencies (Source).

According to this article it should be the other way around :

In economic theory, if the interest rates in one country increase, then the currency value of that country will increase as a reaction. If the interest rates decrease, then the opposite effect of depreciating currency value will take place.


So why did the value of the Dollar decrease?


2 Answers 2


It is correct that higher rates should strengthen the dollar... IF

  1. the increase in interest rates is unexpected and
  2. all else equals.

I haven't followed this particular rate hike, but here is a basic explanations why the dollar might weaken after an increase in interest rates:

The rate hike was widely expected and already priced in by the market, As a result, it didn't have much of an effect on the exchange rate. Keep in mind that the dollar can fluctuate quite significantly even on days without a Fed decision. The move you refer to might be one of these fluctuations and have nothing to do with the rate hike. Or a small move due to the rate hike might have been overshadowed by a bigger move due to a different factor.

It's worth keeping in mind that it's not the events themselves that matter for exchange rates (or stock prices), but how these events turn out relative to expectations -- markets are forward-looking.


Yes, that may be a long-term pattern, unless their is a fear of inflation, or a slowdown in the economy. For example, if investors have fear that the rise in interest rates could actually lead to an economic slow-down, the currency can decrease in value in the short-term. As you know, rising interest rates are recessionary in theory (and slow the increase in M2 in many cases). If traders have fear that they rise in interest rates will cause the economy to slow, and are concerned that a central bank may respond to the slowdown by issuing more currency in the future, they may become short-term sellers of the currency.

Another issue is trading. Look at the stock market today. In order for foreigners to trade they must use US dollars. This increases the demand for dollars. However, if there is fear of a stock market decline, that will decrease the demand for dollars in the short-term, and in the short-term can lead to a falling stock market.


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.