The US dollar and interest rates have been closely tied together for the past century. In this essay, I will explore the correlation between the two, starting with the events that led to the establishment of the Federal Reserve System and the gold standard, and continuing with the different monetary policies and economic events that have affected the US dollar and interest rates in the last 100 years.
In 1913, the Federal Reserve System was established to provide a stable monetary system for the US economy. At the same time, the gold standard was adopted, which meant that the value of the US dollar was fixed to a certain amount of gold. Under this system, the value of the dollar was tied to the amount of gold in the US Treasury, and interest rates were set based on the supply and demand for credit.
In the 1920s, the US economy experienced a boom, which led to a period of low interest rates and a strong US dollar. However, this period was followed by the Great Depression, which led to a sharp decline in the value of the US dollar and a rise in interest rates. To combat the depression, the Federal Reserve increased the money supply, which led to inflation and a further decline in the value of the dollar.
During World War II, the US dollar became the world’s dominant currency, and the gold standard was abandoned in 1971. Since then, the value of the dollar has been determined by the supply and demand for it in the foreign exchange market. The Federal Reserve has used interest rates to influence the value of the dollar and control inflation.
In the 1980s and 1990s, the US dollar was strong, and interest rates were high, as the US economy experienced a period of growth and low inflation. However, in the early 2000s, the US dollar weakened, and interest rates were lowered to stimulate economic growth after the dot-com bubble burst and the 9/11 terrorist attacks.
In the years leading up to the 2008 financial crisis, interest rates were low, and the US dollar was weak. The crisis led to a global recession, which prompted the Federal Reserve to lower interest rates to near-zero levels and implement quantitative easing to stimulate the economy.
In recent years, interest rates have remained low, and the US dollar has fluctuated in value, as the US economy has experienced slow growth and low inflation. The Federal Reserve has implemented a range of monetary policies, including low interest rates and quantitative easing, to stimulate the economy and maintain price stability. However, this changed drastically in 2022, as the inflationary pressures of the world reopening from the Covid lockdowns has forced a massive amount of demand to hit the system in one shot. Because of this, the Federal Reserve abruptly changed course and raised rates rapidly, and sent the US dollar much higher. In 2023, other central banks are raising rates, so this has led to a dampening of US dollar strength.
In conclusion, the correlation between the US dollar and interest rates over the last 100 years has been significant. The value of the dollar and interest rates have been affected by a range of economic events, including periods of growth, recession, and inflation. The Federal Reserve has used monetary policies to influence the value of the dollar and control inflation, with interest rates being a key tool in this regard. Understanding the relationship between the US dollar and interest rates is crucial for anyone interested in economics, finance, or trading.