#FedRateCutAffectsDollarTrend The Federal Reserve’s interest rate decisions have significant effects on other currencies, mainly due to the role of the U.S. dollar as the world’s reserve currency. Here’s how: 1. Interest Rate Hikes (Tightening Policy) When the Fed raises interest rates: • USD Strengthens: Higher interest rates attract foreign investment, increasing demand for the U.S. dollar. • Other Currencies Weaken: Emerging market currencies, in particular, tend to depreciate as capital flows out toward the U.S. • Commodity Currencies Decline: Currencies like the Australian dollar (AUD) and Canadian dollar (CAD) may weaken since commodities (priced in USD) become more expensive. • Euro (EUR) & Yen (JPY) Pressure: Higher U.S. rates make borrowing in USD costlier, affecting economies relying on cheaper dollar financing. 2. Interest Rate Cuts (Easing Policy) When the Fed lowers rates: • USD Weakens: Lower interest rates reduce demand for U.S. assets, causing investors to shift to higher-yielding currencies. • Emerging Market Currencies Strengthen: More capital flows into riskier assets. • Euro and Yen Gain Strength: Investors may shift funds into these currencies as interest rate differentials narrow. 3. Indirect Effects • Carry Trade Impact: A strong USD makes low-yielding currencies like the Japanese yen (JPY) and Swiss franc (CHF) more attractive for carry trades. • Global Trade Balance: A stronger dollar can hurt U.S. exports, benefiting competitors like China and the Eurozone.