How do changing US interest Rates affect the Dollar Value

[Cityliving]

Hey there,

Whilst I understand that changing the interest rate in a country would make that place less attractive to investment of cash etc (i.e. less interest on savings in the most basic look at it).

What I dont get is why the dollar itself loses value.
Can you not buy dollars and put them in ECB or elsewhere covered accounts?
Is it because it shows less confidence in the US economy and therefore this is reflected in the currency?

I would really appreciate someone explaining this to me!

Thanks

 

[Protocol]

If you hold USD, no matter where, you earn the USD int rate.

So a falling USD int rate makes the USD less attractive to hold.

So people sell the USD and buy other currencies, that have a higher yield.

So the USD falls.

 

[Cityliving]

But I can buy US dollars and put them into an account in Anglo Irish Bank for eg

 

[shnaek]

Also when you lower the interest rate it means banks can loan out more money, effectively 'printing' more dollars, and thus devaluing the dollar.

 

[jpd]

But I can buy US dollars and put them into an account in Anglo Irish Bank for eg

Yes, but you will only get the dollar interest rate not the higher euro or sterling rates

 

[ixus]

Hey there,

What I dont get is why the dollar itself loses value.
Can you not buy dollars and put them in ECB or elsewhere covered accounts?
Is it because it shows less confidence in the US economy and therefore this is reflected in the currency?

One way of looking at it is that the FED is flooding the US market with more $'s while the ECB is holding rates and the BoE is more cautious. The ratio of supply of USD to EUR has gone up, so for every EUR, there's an increasing amount of USD.

"In a speech in November 2002, early in his first stint with the Fed, Bernanke approvingly mentioned a Milton Friedman parable about how a "helicopter drop" of cash could push prices upward. It was simply an attempt to reassure then-skittish markets that the Fed had ways to stave off deflation, but the image of a man willing to dump bills out of helicopters stuck. In hard-money circles, Bernanke is still known as "Helicopter Ben.""
http://money.cnn.com/magazines/fortune/fortune_archive/2006/07/10/8380834/index.htm