The Expectations of the Dollar

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The dollar declined for a fourth day against the yen and Euro after a report showing slower-than- expected inflation eased speculation that the Federal Reserve will raise interest rates more than twice this year. The dollar has fallen more than 2 percent against the euro and more than 1.8 percent versus the yen the week ending Mar 16, the biggest drops since the week ended Jan…

Introduction

Interest-rate futures demonstrate that the traders are certain the Fed will increase its benchmark to 4.75 percent on March 28, and predict about a 65 percent chance of another increase to 5 percent at the May meeting. However the outlook was not the same say in October 2005 when Fed was expected to go in for graduated dosages of increase in interest rate in keeping with the trend began since June 2004. The dollar had then risen 2.3 percent against the yen since the end of June 2005. The dollar ran its third straight quarterly gain, reported in October 2005, against the yen, the longest winning streak since 2001, as the Federal Reserve stuck to its policy of ''measured" increases in interest rates. The markets had then expected the dollar to rally to about 115 yens. The yield advantage of 10-year US Treasury notes with Japan had averaged 2.87 percentage points in 2005 year and reached as much as 3.27 percentage points on March 28 2005. As a result of these Japanese investors were buying the dollar to purchase overseas assets, such as Treasuries strengthening interest in dollar. ...
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