Is This Going to Be a Forex Race to the Top?

At the worst of the Great Recession the US Federal Reserve started a policy known as quantitative easing (QE). They purchased huge quantities of bonds and lowered interest rates. This has been credited with saving the US economy from sliding into a prolonged depression. Europe was slow to react moving to austerity measures first which brought on a worsened recession. But the European Central Bank later followed the Fed’s lead as did other central banks around the world. The resulting period of extremely low to even negative interest rates drove down the dollar and then other currencies as central banks followed the Fed’s lead. But now that economies are growing, central banks across the globe are unwinding their QE policies by raising rates and in the case of the Fed letting bonds come due and depositing the money back in the US treasury. Now the previous Forex race to the bottom is turning into a Forex race to the top. How will this turn out?

Results of Monetary Tightening

Bloomberg reports that U.S. stocks are down and there is a bond rout due to central bank unwinding policies.

The hawkish tone from developed-nation central banks continued to roil financial markets, with U.S. stocks falling the most in seven weeks, Treasury yields rising to levels last seen in May and crude settling below $46 a barrel.

The 10-year yield climbed to 2.37 percent, with DoubleLine Capital’s Chief Executive Officer Jeffrey Gundlach saying the selling has only just begun. The S&P 500 Index closed below its 50-day moving average for the first time in seven weeks, with yield-sensitive shares leading losses. The dollar weakened following a private report that showed the pace of U.S. hiring moderated before Friday’s government payrolls data. The yield on benchmark German bunds hit the highest since January 2016.

Higher interest rates make money more expensive and this typically has a dampening effect on business. How will this affect stocks and the US dollar?

Stocks

Market Watch reports that U.S. stocks closed sharply lower.

U.S. stocks closed lower Thursday as investors continued to rotate out of battered technology names. A combination of geopolitical jitters and growing signs that global central banks are inching closer to unwinding policies that have helped to support both stocks and government bonds is also weighing on the broader market.

A round of economic data, including readings on private-sector payrolls and weekly layoffs, did little to soothe worries about the expected muted pace of the Federal Reserve’s policy plans.

US Dollar

Business Insider reports that the US dollar and stocks both fall as treasury yield go up.

Stocks around the world fell and U.S. Treasury yields rose on Thursday while the euro gained on the U.S. dollar after minutes from the European Central Bank’s latest meeting showed it could be open to scrapping its bond-buying pledge.

The winner of the Forex race to the top will be the country that unwinds their monetary policy fastest.