Global Interest Rates Drop, US Dollar Rises

Following rate cuts from the Fed, China and Japan last week, the Bank of England and European Central Bank slashed their key interest rates today. Central Banks from around the world are modifying their monetary policies in a coordinated effort to contain the impact of the global financial crisis.

The Bank of England shocked the markets today with a wider-than-expected 150 basis point cut in interest rates to 3% (see full story here), while the ECB reduced its lending rate by 50 basis points to 3.25%. England's interest rate is at its lowest level since 1955.

Financial authorities in Switzerland and Australia also reduced their key interest rates this week as countries around the world struggle to cope with the current financial turmoil. Switzerland reduce interest rates by 50 basis points today to 1.75%, while Australia cut rates by 75-basis-point on Tuesday to 5.25%.

As the severity of the financial and economic crisis deepens, risk aversion has caused major unwinding of carry trades (when investors borrow in a low-yield currency to buy a high-yielding one). Additionally, the “safe-haven” status of the US dollar is also helping it to rise against currencies of countries with rapidly deteriorating economies.

The dollar index , which tracks the greenback’s standing against a basket of currencies, rose 7.78% in October marking its biggest percent increase since March 1991.

The US dollar has gained approximately 26% in the past three months against the Australian dollar, 17% versus the New Zealand dollar, and 15% against the euro and pound sterling. Despite solid gains in the US dollar versus some of the major currencies, the greenback has depreciated about 11% against the low-yielding Japanese yen.

The Japanese yen , has appreciated about 38% against the Australian dollar in the past three months, 28% versus the New Zealand dollar, and 26% against the pound sterling.

Here is a look at where some of the world's interest rates stand:

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Some ETFs that track the performance of currencies include:

  • PowerShares DB U.S. Dollar Index Bullish
  • CurrencyShares Japanese Yen
  • CurrencyShares Pound Sterling
  • CurrencyShares Swiss Franc
  • CurrencyShares Euro Currency Trust

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