Federal Reserve & Interest Rates

The underlying reason why commodities have retreated in the past month is that the dollar has experienced a resurgence in currency markets.  Currency experts feel that the dollar is ready for a period of renewed strength after years of bearish sentiment.

Weakness in foreign economies has increased demand in the greenback as it is looking like the European Union is in the midst of a recession.  Recent data showed that the EU economy actually contracted last quarter.

Taken with the fact that earlier this week the Commerce Department revised GDP upwards for the second quarter the Fed is more likely to raise interest rates before the European Central Bank(ECB) will.  The ECB has maintained it’s strict stance on price stability but many analysts feel it will eventually have to reverse it’s course from last month, after it raised rates by a quarter percent.

There could well be a strengthening synergy effect between the dollar and oil.  As the dollar gains and oil falls it lowers inflationary pressure across the globe and will take some of the pressure off the ECB to maintain higher interest rates and could give them some leeway to deal with contracting economic growth.

However, the same case could be made for the Fed, there is much less pressure on them to raise rates than there was two months ago and the Fed Chairman feels inflation will continue to moderate into 2009.  The Fed is still concerned with troubled financial markets but the upsurge in GDP is definitely a welcome sign.

If the dollar does go on a sustained run it could be rough times ahead for exporters and the foreign growth potential of multinational corporations particularly the tech sector.  Trade and tech have been a some of the few bright spots during this long economic slowdown.