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Politics : Dutch Central Bank Sale Announcement Imminent? -- Ignore unavailable to you. Want to Upgrade?

To: Alan Whirlwind who wrote (12603)	12/1/2001 2:40:14 PM
From: sea_urchin	Respond to of 81897

Alan >won't rising US rates bolster the dollar? These days it seems the lower the interest rates the better it is for business and therefore low interest rates are now supposed to be supportive for a currency. Examples: a) Low interest rates, strong currency. Presumably low inflation, therefore low interest rates are positive for business and the currency. This attracts foreign investment. Seems to me this is the situation in the US at the moment where we see a poor economy, low interest rates and a strong dollar. Of course, in the present "war-like" situation the dollar is considered to be a safe haven and foreigners will buy dollars for that reason, alone. I don't think a strong dollar is particularly desirable in the situation of a weak US economy because it impedes exports. It may therefore be the intention of the authorities to try and weaken USD, somewhat, with the intention of improving exports. b) Low interest rates, weak currency. Low rates are inflationary unless the economy is very depressed, like in Japan. Therefore no foreign capital inflow. c) High rates, strong currency. Strong economy but with inflationary tendency requiring high interest rates. This attracts foreign capital. d) High rates, weak currency. High rates in an inflationary environment and a poor economy. Therefore no attraction of foreign capital. This used to be the story where high interest rates were used to "defend" the currency, as you suggest. The cost is that high rates are punitive to business. However, it's my belief they can do whatever they wish with interest rates, exchange rates and the "given" inflation rate and justify their actions by whatever story they want to tell the people.