Fed rate hike gives further stimulus to rising dollar
In the prior part of this series, we looked at Oracle’s (ORCL) fiscal 2Q16 results as well as the significant impact of the dollar on its top-line growth. The graph below shows the performance of the PowerShares DB US Dollar Index Bullish ETF (UUP), which follows price movements of the US dollar.
The US dollar has been strengthening for the last year and a half, with occasional ups and downs. It further gained strength on the increasing anticipation of the widely expected interest rate hike. As expected, the Fed raised the interest rate 0.25% on December 16, 2015. It was the first time since 2006 that the Federal Reserve has raised the rate. As a result, the US dollar gained more strength.
Dollar is likely to rise more in the near future
Higher interest rates tend to have an adverse impact on gold (GDXJ), which is a non-interest-paying investment. Higher interest rates increase the opportunity cost of holding gold while boosting the dollar. It’s worth noting here that gold and the dollar usually follow an inverse relationship.
To know how the rising dollar has impacted gold prices, please read Gold Once Again Eases on Stronger US Dollar. The US Dollar Index, or DXY, which measures the strength of the US dollar against a basket of major currencies, rose 1% to 98.88.
Strengthening of the dollar is likely to continue for some time. Commenting on the impact of the Fed’s rate hike on the dollar, Minori Uchida, Head of Tokyo global market research at the Bank of Tokyo-Mitsubishi UFJ, stated, “The dollar’s strength may persist for a while, as investors feel the mood right after the rate increase, but then may turn top-heavy.”