Do you know that the Federal Exchange is using the interest rates as a tool to control the value of US dollars? Yes, it the Federal Exchange who is responsible for maintaining the value of USD and they are using so many tools to control it but interest rate is one that they find most effective. Hence, it is the one they commonly use.
If you are engaged in foreign exchange trading and want to know the factors that greatly affects the value of USD, it is suggested that you learn these things. If you think only economists are interested in this topic, think again. Forex traders must know the things that directly affect the value of their items for exchange.
The Federal Reserve is closely monitoring the overall economic situation of the country. If the FEDS can foresee that an economic overheat is likely to take effect, the possible result is inflation. To avoid inflation, FEDS will start selling debt. Increased debt will decrease money supply in the circulation. If the demand for money is the same and the supply is less than the demand, the value of the dollar will also increase. If the value of USD has increased, the FEDS has the liberty to increase the interest rates.
If it is the other way around like the interest rates is too high, the probable outcome is many businesses will be forced to exit the industry. Result would be economic downturn. To avoid this scenario, the FEDS will start buying debts and holding them. Money supply will increase and if demand is the same, the value of the dollar will decrease. Then FEDS can lower down the charges on the interest rates.
This is how the FEDS manages the value of USD via controlling the interest rates. Of course, FEDS have so many tools at their disposal just to direct the value of USD. But this is one of the most effective and commonly used tools. If you are a Forex trader, consider this information and you will be on your way to earning great profits.
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