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Rising Interest Rates and Dollar Revaluation

1/6/2021

Many investors accept that rising interest rates will be a matter of course over the next two years as they climb from extraordinarily low levels. Ever expanding government and trade deficits led to a dollar revaluation. Rising interest rates and the dollar revaluation will have important consequences for investors in 2010 and beyond.

First, the steep yield curve at the end of 2009 will flatten over time as history has taught us. When rates rise the the value of the underlying bonds falls. Second, the recovery of the U.S economy will outpace the developing countries in Europe and Japan. This will help to revaluation of the U.S. dollar, as investors seek to move their capital to stronger global economies. The capital flowing into Treasuries will place downward pressure on interest rates. How can investors position their portfolio to take advantage of these important trends?

The Federal Reserve is contemplating several actions to remove some of the monetary stimulus from the economy that will encourage rising interest rates. A stronger economic recover will help the U.S. dollar to revaluate.

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