Foreign Currency Trade Loan - Federal Reserve Rate Reduction Effect on Forex

Nov. 23, 2010 - PRLog -- Foreign Currency Trade Loan

Federal Reserve boss Ben Bernanke has recently reduced the Federal Fund Rate and the Discount Rate in the United States by a further 0.25% each. This brings the number of recent interest rate reduction by the Federal Reserve to nine since last August.

What does it mean when the Federal Reserve does so, and what are the possible repercussions it may have on foreign currency exchange rates and the forex trading market?

The rates set by the Federal Reserve determine the interest on loans banks take from each other in federal funds, and loans they take directly from the Fed. They set the reference point by which all interest rates that affect you and me are set. Bank loan interest rates, mortgage interest rates, your savings account's interest rate, The cost of financing a new car or a new home - the interest rate on the money you save or the credit you take is set in reference to these two Federal Reserve rates . If they are reduced, so do interest rates for everyone. Get Internet #1 - Foreign Currency Trade Loan @ http://forexcure01.webs.com and be Successful forever!

How does that concern forex trading? Well, it does, to a great degree.

The main purpose of lowering the Fed rates is to boost commerce. Reduced interest rates make it less beneficial for investors and consumers (that's us) to hold on to their dollars, because their dollar holdings generate less interest profit for them, so presumably consumers would spend more of their dollars instead. Furthermore, consumers are provided with cheaper loans (less interest on loans means loaners would have to pay back less) for bigger buys. This has to be done very carefully so that inflation doesn't break out.

As for investors - they too find it less beneficial to hold dollars, for the same reason. They would seek to sell their dollars and move their money into alternate forms of investment: stocks, bonds, commodities, real estate, and also - foreign currency, because with the interest rate on the dollar reduced, the ratio of interest rates is tilted in favor of foreign currencies.

And that's where the forex point comes in. Reduced interest rates mean that the potential sellers of dollars may have difficulties finding buyers for their dollars. With supply increased and demand decreased, the dollar would have to be sold cheaper - meaning, the exchange rate of foreign currencies would rise against the dollar. Get Internet #1 - Foreign Currency Trade Loan @ http://forexcure01.webs.com and be Successful forever!

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