The Fed raising interest rates means it will be more attractive to use the US dollar instead of other currencies. Domestic funds and funds from some foreign companies will flow into the US markets, which is a crucial aspect of the US investment market. At the same time, higher rates are likely to cause the appreciation of the US dollar. In addition, the Fed's interest rate hikes tend to raise the deposit rates offered by American banks. Many intelligent investors from the US and abroad will choose to deposit their money in American banks. The US stock market will fluctuate, causing stock prices to fall, but from a broad perspective, the Fed's rate hikes on the U.S. economy has more pros than cons.
How Fed rate hikes affect stock markets
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For the U.S. stock market, rising interest rates will increase the interest rate paid on bank deposits. Hence, investors will choose to deposit their money in banks, which will drastically reduce the number of funds flowing into the stock market;
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For China's stock market, the inflow of capital into the US stock markets will lower the investment in Chinese stocks, and their stock prices will likely fall, impacting the global stock markets.
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When the Federal Reserve raises interest rates, mainland funds or foreign capital will flow into the US markets. As a result, once the dollar appreciates, the RMB will likely depreciate, and the cost of purchasing raw materials for Chinese companies will increase.
How Fed rate hikes affect forex markets
If the Federal Reserve raises interest rates, it makes assets quoted in the US dollar very sought after, as the US dollar appreciates significantly. The value of each country’s currency will likely decline amid the increasing propensity of investors to purchase US dollar assets, which will also significantly impact a country’s capital flow. But most of the time, after the Fed announced a rate hike in the foreign exchange market, the dollar did not move higher.
The main reason for the above is that the foreign exchange market has certain expectations for the US dollar about raising interest rates. The markets keep track of various aspects, such as the economic situation in the United States and the speeches made by Fed members before the rate hikes. At this time, the foreign exchange market may have already concluded that the US dollar is about to experience higher interest rates. Hence, there would be a lot of information about the direction of the US dollar interest rate hike in the foreign exchange market. When the US Fed finally raises interest rates, the market may have already priced in the impact of this interest rate hike on the foreign exchange market. Therefore, when the Fed makes the actual announcement, it will not react significantly. On the other hand, if the Federal Reserve does not announce an interest rate hike, the market may have a relatively large reaction, given that it was expecting a rate hike.
What impact will the Fed rate hike have on the forex market?
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The Fed raises interest rates, which means that the US dollar enters a strong channel, and the currencies and commodities linked to the US dollar will depreciate;
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The higher interest rates create a strong impetus for international capital to flow into the United States;
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Countries supported by the US dollar-denominated capital will face the risk of capital pumping and capital flight;
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It shows that the Fed is optimistic about the economic development of the United States because it needs to adopt tighter monetary policies to suppress the economy’s overall momentum;
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Overall, the US dollar interest rate hike is good for the US dollar, making the US dollar index rise.
A Fed rate hike means an increase in the federal funds rate, which is the rate at which commercial banks lend money to each other. The higher interest rates have a substantial impact on the interest rates paid by commercial banks, affecting the interest rates offered by banks.
When the Fed raises interest rates, banks will also increase the interest on user deposits. Therefore, foreign exchange investors prefer to hold US dollars over other currencies. As international funds pour into the United States in search of higher yields, the US dollar will be stronger in the foreign exchange market and appreciate relative to other currencies. Therefore, other currencies will depreciate against the US dollar.
High-risk investment warning: Trading Foreign Exchange (Forex) and Contracts for Differences (CFDs) is highly speculative, carries a high level of risk and may not be suitable for all investors. You may sustain a loss of some or all of your invested capital, therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading on margin. Any opinions, news, research, analysis, prices or other information contained in this presentation is provided as general market commentary and does not constitute investment advice.
Editors’ Picks
EUR/USD stays below 1.0900 as Q1 comes to an end

EUR/USD has lost its traction and declined below 1.0900 in the American session on Friday. Quarter-end flows seem to be allowing the US Dollar find some demand but the risk-positive market environment seems to be limiting the pair's downside ahead of the weekend.
GBP/USD trades below 1.2400, looks to post weekly gains

GBP/USD has edged lower after having tested 1.2400 earlier in the day but remains on track to end the third straight week in positive territory. The upbeat mood remains intact after soft PCE inflation data from the US, making it difficult for the US Dollar to continue to gather strength.
Gold tries to stabilize near $1,980 following earlier spike

Gold price has returned to the $1,980 area following a spike above $1,987 with the initial reaction to lower-than-expected PCE inflation figures from the US. Meanwhile, the benchmark 10-year US Treasury bond yield stays in the red near 3.5%, providing support to XAU/USD.
Will Dogecoin price pull an XRP and rally 60% next week?

Dogecoin price has been in a tight range bound movement since November 22. The recent recovery above the range low looks promising and hints at an explosive move for next week.
Week ahead – Nonfarm payrolls to set the tone for US dollar

With the banking turmoil receding, market participants will turn their attention back to economic releases. The spotlight will fall on the US employment report.
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