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Published: October 12, 2009
The Reserve Bank of Australia hiked its interest
rate this week...
This was a big piece of financial news. Central banks around the
world have been cutting rates for two years, and interest rates
are as low now as they've ever been.
When a company raises its dividend, its stock becomes more
attractive to investors. Its share price rises. When a bank
raises interest rates on its savings accounts, people deposit
more money in the bank. It's the same way in the currency
markets. Rising interest rates make a currency more attractive
and it rises against other currencies with stable interest
rates...
The governor of Australia's central bank hinted there would be
more interest rate rises on the way. This could be the start of
a new trend of rising interest rates around the world. Analysts
say Canada, New Zealand, South Korea, and Norway are likely
candidates to follow Australia's lead.
If this is the start of a new trend of rising world interest
rates, you can expect big new trends in the currency exchange
markets, too. That's because interest rates are the single most
important driver of exchange rates in the currency markets.
Australia's currency has risen this week as investors celebrate
the higher interest rates they'll receive for owning it.
On the other hand, the dollar has fallen 15% in the last seven
months. Newspapers will say it's because the Saudis want to
price oil in euros or because the Fed prints too much money.
The real reason is, it has the lowest interest
rate of any major currency in the world except Japan, and
speculators expect these low rates to remain indefinitely.
So how do you make money from a new global trend of rising
interest rates?
While other central banks are considering raising rates, the Fed
has so far refused to join the party. The dollar is the
worst-performing major currency in the world this year as a
result.
Two weeks ago, the Bureau of Labor released its monthly
unemployment report. The report showed that somewhere close to 6
million jobs have vanished from the American economy in the last
18 months. As I write, jobs are still disappearing, albeit at a
slower pace.
The employment situation hasn't
been this bad since World War II
ended and defense contractors
eliminated 4.3 million jobs no
longer needed for the war effort.
With the ongoing unemployment
bloodbath, rate hikes in America are
unlikely until next year.
First, this gives you a great
opportunity to buy the dollar right
now, while it's cheap and no one is
anticipating rate hikes from the
Fed. For regular investors,
PowerShares DB US Dollar Index
Bullish (NYSE: UUP) is
the best way of profiting if the
dollar rises. It's a fund that
replicates the performance of the
dollar against a basket of the euro,
Japanese yen, British pound,
Canadian dollar, Swedish krona, and
Swiss franc. By the time Bernanke
announces his first rate hike next
year, the dollar will have already
rallied 10% or more.
Second, a trend of rising interest
rates on currencies is great for
people looking to buy gold at lower
prices. Gold has no interest rate.
So when interest rates rise on world
currencies, they become more
attractive – and they rise –
relative to gold. This is especially
true with the dollar. It's the
world's reserve currency and gold is
incredibly sensitive to movements in
its interest and exchange rates.
As long as unemployment keeps
rising, there's no way the Fed
raises interest rates and gold
prices will stay high. But next year
is a different story. The first hint
of rate increases by the Fed will
send shockwaves into the gold
market. If you're looking to buy
gold, wait until Bernanke starts
raising interest rates. By then the
market will have already discounted
the rate hikes and gold will be
forming a low point. -- Tom Dyson
Contributing Editor
Daily
Wealth Editor's Note: This
article originally appeared in
Daily Wealth. |
