What happens to the dollar if the Fed raises interest rates?

Hopes for diplomacy in the markets continue following the Israel-Hamas conflict. Fed decisions carry great importance. As markets await interest rate decisions, various scenarios are being considered.

Here are the potential scenarios and their effects based on Fed and Central Bank decisions globally and in Turkey:

If the US Central Bank, or the Fed (Federal Reserve), raises interest rates, it helps reduce inflation and increase foreign currency in the country, which in turn helps the local currency gain value against other currencies. The US dollar gains value, especially against the currencies of developing countries. Increasing interest rates also increases the return on risk-free investments. Individuals and institutions shift their savings from higher-risk investment vehicles like stocks to lower-risk interest and derivative investment vehicles.

Thus, while demand for the stock market decreases, the amount of money in circulation enters bank vaults, leading to a downward trend in inflation. It also attracts investors from abroad who want to take advantage of high interest rates, increasing the amount of foreign currency in the country.

WHAT HAPPENS IF THE CENTRAL BANK RAISES INTEREST RATES?

The Central Bank sets an interest rate for these transactions. By changing this rate, it forms monetary policy. This interest rate determined by the Central Bank is called the policy rate. Before the Central Bank of the Republic of Turkey's Monetary Policy Committee meeting, citizens are looking for answers to questions about what happens to the dollar if interest rates rise, while gold investors are looking for answers to what happens to gold if interest rates rise. The Central Bank raises the interest rate when it sees an inflation threat. Thus, it tries to lower inflation by reducing total demand.

-Banks increase the interest rates they apply to their own customers.

-The perception of fighting inflation strengthens.

-Foreign exchange rates fall, and the TL gains value.

-Borrowing is postponed because the cost of taking out a loan increases.

-Inflation expectations fall.

-The price of imported products falls.

-Spending is reduced.

-Demand for products falls, and exports decrease.

-What happens to the dollar if the Fed raises interest rates?

If the Fed continues its strong interest rate hikes, it is expected that the dollar will strengthen globally due to the safe-haven effect, and gold prices will decline and be suppressed.

WHAT HAPPENS TO THE DOLLAR IF THE FED LOWERS INTEREST RATES?

If the Fed lowers interest rates, the dollar loses value in the short and medium term. Since the price of gold is priced in dollars in international markets, the price of ounce gold will gain value as the dollar falls. Gold, which has a safe-haven feature, is among the top investment vehicles. Therefore, the Fed cutting interest rates or signaling an interest rate cut will positively affect gold prices.

DOES INTEREST RAISE GOLD?

The Fed's decision to raise interest rates affects gold in two ways. First, looking at ounce gold, the Fed's interest rate hike accelerates outflows from gold worldwide, which may cause pullbacks in ounce gold. Second, looking at gram gold from the dollar effect, since the dollar will gain some value, there may be some increase in value in gram gold.

WHAT HAPPENS TO THE DOLLAR AND GOLD IF THE CENTRAL BANK KEEPS INTEREST RATES CONSTANT?

According to experts, if the Central Bank keeps interest rates constant, there may not be very sharp movements in gold and the dollar.

WHAT HAPPENS TO THE DOLLAR AND GOLD IF THE CENTRAL BANK LOWERS INTEREST RATES?

If the policy rate falls, the dollar generally rises in the short or medium term. The rise in the exchange rate also raises gold prices. If the Fed lowers interest rates, the dollar loses value in the short and medium term. The Turkish Lira gains value.

The dollar index remains calm; US data is key

TURKEY

On October 16, the budget deficit in Turkey for September was realized as 512.6 billion TL.

The data flow domestically is calm today.

EUROZONE

On October 16, the trade balance in the Eurozone was announced at 11.9 trillion euros, above expectations. European Central Bank (ECB) chief economist Philip Lane said that for the ECB to be sure that inflation has returned to its 2% target, it will look at how wage agreements will take shape in the new year and whether the recently rising oil prices will create a new supply problem.

While there was a rise in the euro/dollar parity following the decline in the dollar index, European stock markets, led by the DAX, started the week with buyers.

While the ZEW economic sentiment index in the Eurozone was expected to be announced at -7.7 points, the ZEW economic sentiment index in Germany is projected to come in at -9.1 points.

USA

On October 16, the New York manufacturing index in the US was announced at -4.6 points, above expectations, against the expectation of -6.4 points. US Treasury Secretary Janet Yellen said in a statement that high interest rates in the US could be permanent and that the US economy is currently growing well, supported by strong employment and consumption.

Philadelphia Fed President Patrick Harker emphasized that interest rates should not be raised further and that the Fed's waiting for a while is the most important step to see the effects.

While the dollar index completed the first trading day of the week with sellers due to the statements, US stock markets completed the day with buyers due to positive expectations regarding balance sheets. US 10-year bond yields continued their rise, closing yesterday at 4.70%, and are trading at 4.73% this morning.

We see that interest rate pressure is still at the forefront in the markets.

While retail sales, one of the important data on the consumption side in the US, are expected to be announced at 0.3% on a monthly basis, core retail sales are projected to come in at 0.2% on a monthly basis. While industrial production is expected to come in at 0.0% on a monthly basis, the capacity utilization rate is estimated to be 79.6%.

The expectation for the NAHB housing market index is 44 points. Speeches by Fed members Bowman and Williams will also be followed.