US Central Bank Expected To Lower Interest Rate

The US Federal Reserve Bank, also known as the Central Bank is having meetings Monday and Tuesday to decide how to react the worsening world economy and specifically the US economy.  With negative growth for the last two quarters it is expected the Central Bank will cut its rate to .5% or the lowest rate since 1953.

Interest slows growth, so when growth is negative the general thought is that government policy should be developed that helps to stimulate growth.  Lower interest rates will put more downward pressure on the dollar. bank Again, if it will rise or fall against a particular currency depends on how that currency is behaving in general.  It could still rise against some currencies but it will push the value of the dollar lower.  The dollar may stay strong against some currencies but this move will weaken the dollar.

The dollar has been declining this month.  Not just against the Peso but many other currencies as well. This month has already seen a 1peso drop vs the dollar in two days.  The stock market is up on these rumors and rumors that President Bush will tap into the $700 billion intended for financial institutions and use it to rescue the automakers.

There are several factors putting downward pressure on the dollar at the moment.   There seems to be some pressure on the Philippine Central Bank to lower its interest rate which should put downward pressure on the Peso.  Growth had been brisk in 2007 and strong in 2008 but nearly as strong.  The Philippine economy is expected to continue its growth, even in 2009 but not at the same high rates as it has seen.

The high rate of growth in the Philippines has pushed prices up.  The cost of oil has also pushed other prices higher.  With the price of oil falling, coupled with slower growth, it should help slow inflation which had been causing havoc among the Filipino.

The entire point of the US Central Bank rate cut is to help stimulate banks lending to each other.  This lending creates money.  The creation of money creates more money and that is the forces behind the downward value of the dollar.  If demand remains higher than the supply, the dollar should continue to rise in value.

Another factor, in determining the value of the dollar, is the rate at which people spend money.  When we spend money and deposit it in banks, that too increases the amount of money available.  Indications are that people are not spending.  And banks are not lending.  With companies, including profitable companies laying people off, people are saving money.   Americans are also saving because they believe that there will be better deals out there in the near future.

Hopefully the dollar will not fall much more, I am no longer confident that the dollar will continue to rise.  The bailouts are the reason for that.  Those too create money.  Mr. Obama’s plan to spend 1 trillion in public works will also create money.  I’m concerned the value of the dollar could go down.  I hope it doesn’t go back below 40Php.  I don’t know where it is going.  There are a lot of downward pressures on the dollar right now.

The lower the value of the dollar, the more the US will export.  That may be part of the plan to  help get the US economy growing again.  A devalued dollar will reduce the trade deficeit we’ve heard so much about during some periods.  I’d like to say and think everything is rosey for the dollars value but it just doesn’t seem to be the fact to me.

Tagged with:

Filed under: Expat Finances

Like this post? Subscribe to my RSS feed and get loads more!