US Interest Rates VS Currencies
I have some issues with Christian’s post, Should the Fed Ease for the Sake of the USD, and wanted to analyze his hypothesis that US interest rates have no correlation to currencies over the long term.
I downloaded daily closing data for the GBP, CHF, JPY, and the 90 day Fed Fund Rate index from late 1989 through yesterday. Note, a Fed Fund Rate index of 100 = 0% interest rate and an index number of 95 = 5% interest rate.
Although my data doesn’t reach back past 1989, I do see correlations to the interest rates and the various currencies. Most of the time there are lagged effects in the currencies as the 
Although I disagree with your analysis Christian, thanks for the brain tease!
August 29th, 2007 at 12:47 pm
I can’t argue…
Am I reading this right…
If the Fed Fund Rate goes up the currency lags up, but necessarily downwards?
August 29th, 2007 at 12:51 pm
A rise in the FF index higher toward 100 means that the Fed is cutting interest rates. If the current FF is 5.25%, then current FF index should be a 94.75 (lower).
Soren, a reader left me an email and suggested that I look at the interest rate differentials between the currencies. I wonder where I can get that data.
August 29th, 2007 at 6:29 pm
I like this scathing critique of the Fed’s nanny-ing moves,
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…the Goldman fund pumped in $6 of cheap borrowed money for every dollar raised from the members for a very small percentage fee on profits. Also, as they say on Wall Street, the leverage was a very sweet 6 to 1.
And what does that mean. Let me explain it like this, a hypothetical if not typical situation.
If you buy a stock for $36 and sell it for $72 four months later, you’ve made 100% on your money. If you add $30 of borrowed money to $6 of your own to buy the stock at $36 and sell the shares at $72, your profit is $36, but you’ve made 600% on your $6 of which the hedge fund takes a percentage, roughly 2 percent or 72 cents, so your profit is now $35.24 on the $6 which is 587% and you can live with that.
Multiply that transaction times billions and you are talking not billions but a trillion or more in profits and which is why offshore tax havens like the Cayman Islands and the Bahamas are booming.
But the worm turned as we have been reading.
So now, let’s say you put up $6 and borrow an additional $30 to buy a stock at $36. The stock falls to $18. You have lost $18 on the stock but still have have a stock worth $12 after subtracting your $6. But all of a sudden, becase of the panic that came with this crisis, you have to pay back $30 and quickly for that $2 stock. Your loss is now 300%.
Multiply that little transaction times billions and you understand why Wall Street is close to a nervous breakdown..
Here is what Uncle Ben and the Nanny State have done for Wall Street.
The Fed’s loans are being handed out through what it calls its “overnight discount window.” These loans have traditionally been overnight loans given to banks to smooth the flow of commerce on weekends and holidays. But the loans the Fed approved a few days ago turn out to be 30-day loans.
There’s more. If, at the end of that 30-day period a bank claims it can’t pay the money back, the Fed says the banks can renew them for another 30-days. And then another and another renewal can be had and at no additional charge or late fee. How would you like to have a credit card that worked like that?
http://www.counterpunch.org/corr08242007.html
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August 30th, 2007 at 4:38 am
Sherry,
Thanks for that link, the author makes a great point and I’ve linked it in my delicious links.
August 30th, 2007 at 5:51 pm
Tom,
Glad you see you got my email, I suppose I should have just left it as a comment here on this thread. Try http://www.econstats.com/index.htm for global interest rate data.
Cheers!