Ben S. Bernanke currently serves as Chairman of the Federal Reserve Board.

The dollar grew in strength against the euro for the sixth consecutive week after the Fed announced an increase in the discount rate last Thursday.  The euro, valued at $1.3618 on Wednesday evening, decreased to $1.3544 after the Fed’s Thursday announcement.

The Fed’s decision to raise the rate it charges banks for emergency loans from .50 per cent to .75 per cent is a strong move in the current global economy.  According to Ulrich Leuchtmann of Commerzbank, as quoted in The Financial Times, the Fed may very well be able to raise the main lending rate, Fed funds rate, in the near future.  Leuchtmann states, “It no longer matters whether the Fed funds rate will be raised in August, September, or November.  What matters is that the Fed is the only large central bank able to raise rates in the foreseeable future.”

Others disagree.  While the rise in the discount rate indicates a normalization of monetary policy after measures taken for months to counter the financial crisis, the board has made it clear that the move is not necessarily going to be followed by a hike in the Fed funds rate.  The euro’s rebound on Friday indicates that investors’ reactions may have been overzealous.  Friday’s Wall Street Journal quoted Brian Kim of UBS AG, saying “We had people who got a little bit ahead of themselves as the [hike in discount rate] doesn’t mean the Fed is going to raise the Fed funds rate, so [Thursday’s] reaction was a little extreme.”

Even if the reaction to the rise in discount rate meant a hasty overvaluation of the dollar, the European economic climate indicates that the dollar will continue to rise.  Last week had completed the longest rising stretch the dollar has had since August 2000, six weeks in duration.  The euro had already reached a nine-month low versus the dollar earlier last week, after Greece was ordered to put new deficit cutting measures in order.  Investor speculation that Greece will not be able to control its deficit indicates long-term problems for the euro; any gains in the euro relative to the dollar are likely to be short-lived.

The dollar has also gained relative to the British pound, which will continue to decrease in value as press relates the United Kingdom’s economic climate to be worse than that of Greece.  A decrease in British retail sales has raised fears that the economy is headed back into recession.  If the Bank of England is forced to continue efforts to combat recession, the pound will continue to decline.

The dollar is down relative to the Japanese yen, from 91.15 last week to 90.92.

Economists are uncertain as to the future valuation of the dollar in coming months; however it appears that it may continue to gain strength against foreign currencies if the current global economy continues its current trend.

Related Articles:

1. Movember Gains Traction at BC “Movember” is a movement that raises funds...
2. Fed to Bail Out EU Under the three-stage “liquidity” plan recently announced...