Weekly Market Update

Interest Rate Differentials Fuel USD Strength

Interest rate differentials have driven the USD strength, with higher US rates compared to the Eurozone attracting investors and boosting USD value. Future central bank decisions will continue to influence this trend.

September 16, 2024 5 min read

Dane Smith

Head of North American Investment Strategy & Research

Across capital markets, there are a whole host of influences that have a push/pull effect on asset prices. When it comes to the US Dollar, a strong recent influence has been the interest rate differential between the US and other major economies.

Frequently, during times of economic uncertainty or global risk, the U.S. Dollar tends to be viewed as one of the “safe-haven” assets, providing downside protection. However, when focusing on more stable or recovery periods, interest rate differentials become a key determinant in how the currency moves. A higher interest rate in the US relative to Europe often incentivizes investors to move capital into USD-denominated assets, boosting the US dollar's value. This trend has been particularly evident over the past few years, as the US has maintained higher rates than its Eurozone counterparts.

Global economic troubles may have provided some tailwind for USD strength, but the persistent rate differential effects has been dominant over the past few years. The Fed is about to embark on a rate cutting path and is contemplating a 25 or 50 bps cut at 18 September meeting. The ECB, however, got a head start and initiated its first 25bps cut back in June. Looking forward, we believe the paths decided by central bankers will continue to be a strong influence on the USD, something that historically hasn’t always been the case.

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The views expressed in this material are the views of Christopher Carpentier, Zanub Raza, Dane Smith, and Saketh Reddy Moyilla Sai Shiva through the period ended September 5, 2024 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

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Equity securities may fluctuate in value and can decline significantly in response to the activities of individual companies and general market and economic conditions.

Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

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