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Friday, April 26, 2019

What's happening to the USD now? Why is it rising again?

The USD was supposed to be depreciating as Trump wanted it to be lower.  The USD did depreciate for a short while before rebounding again.  What the hell was going on?  Well, the US FED is causing the USD to appreciate with its rising rates.  Therefore, it looks like the FED and Trump are at loggerheads now.

The USD index is around 98 now compared to below 96 in March 2019.

The USD value is affected by interest rates.  The US Fed manages the US economy by setting an interest rate bandwidth which is currently at 2.25-2.5%.

There are 4 interest rates that we need to familiarize ourselves with:
Interest on required reserves (iorr) : 2.4% now (Max limit is 2.5% and this sets the upper bandwidth)

The bank required capital ratio fund has to be deposited with the Fed which will yield a FED interest rate of 2.4%.

Effective federal funds rate (effr): 2.44% now (This has been rising in April 2019).

The US bank has to pay 2.44% interest rate to the Fed when it wants to borrow money.  The Fed has been raising this interest rate in April 2019 which is signifying a reluctance to flood the monetary system with cheap money.  This is the proximate cause of the recent USD appreciation because the Fed is sending a subtle message which is the exact opposite of Trump's intention.

Interest rate on excess reserves (ioer) : 2.4% now (This is what the Fed will pay when the US bank deposits its excess cash with the Fed).

Overnight reverse repurchase rate (on rrp) : 2.25% now (This is basically a 1-day sell and buy-back scheme conducted by the Fed and this sets the lower bandwidth).  In short, this is the Fed 1-day IOU and the Fed pays 2.25% interest rate.

As we can see, there is a premium difference between the effr (2.44%) and ioer (2.4%).  This premium difference is depicting a monetary tightening condition which also helps to explain the USD appreciation.

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