This is a guest post written by David Nicholls at USForex. Greenback Expat Tax Services proudly recommends their foreign exchange services.
As the US and UK move towards raising interest rates, how should you manage cross border transactions in the coming months?
The movement of interest rates are the main cause for exchange rates to rise and fall. Last week saw some key developments surrounding US interest rates that provided insight into the outlook for the US dollar (USD).
Generally speaking, if a country’s interest rate is rising or perceived to rise in the near future, that country’s currency will gain in value against others as investors seek a higher savings rate on that currency cash deposit. Although not the only influencing factor in exchange rate values, interest rates are arguably the most important. Therefore the outlook for how soon interest rates may start to rise in the US is critical in determining how the USD might fluctuate.
Interest Rates and the Labor Market
Last week, Janet Yellen testified to Congress twice and indicated that the prospect of interest rates rising faster than expected in the US is a real possibility;
“If the labor market continues to improve more quickly than anticipated, then increases in the federal funds rate likely would occur sooner and be more rapid than currently envisioned,” commented Yellen.
The labor market has seen a marked improvement in the last few months with 304,000, 224,000 and 288,000 jobs added in April, May and June respectively. The past 12 months has seen the unemployment level fall from 7.5% to 6.1%.
This improvement in the labour market has put the US Federal Reserve (FED) on stronger footing, determined not to not be seen as ‘behind the curve’ in monetary policy normalisation like former FED chief Alan Greenspan was back in 2004.
The Strengthening of the USD
However before interest rates can rise the FED still needs to finish winding down (or tapering) its program of Quantitative Easing (QE). This is a process of printing money to buy Government issued bonds (Treasuries) and Mortgage backed securities (MBSs).QE is used to artificially supress interest rates on these financial instruments to allow institutions to sell MBS’s at a high price (clearing bad debt and giving them cash to invest), encourage investment away from low risk assets such as Treasuries and allow the government to roll over their own debt at low interest rates.
On its current course this looks like it might be as early as October, should they decide to reduce the final month of QE by $15 billion. If this holds true we broadly expect the USD to strengthen in the medium term against most other major currencies. This USD strength could also be supported as investors seek safer assets because of rising geopolitical tensions in the Ukraine and the Middle East as well as concerns over bubbles forming in the global equity markets.
One exception to this might be the Great British Pound (GBP). QE ended some time ago and in the UK there is an entrenched economic recovery underway. Last week saw a surprise increase in UK inflation from 1.5% to 1.9% resulting in many expecting interest rates to start rising before the end of the year. Previously this had been expected in early 2015. So, although the USD close to 5 year lows against GBP, you might see this downtrend continue – albeit with fluctuations – for the next few months if interest rates rise faster in the UK than in the US.
Managing International Payments
Many large transactions (a property purchase for instance) might be time constrained, but if you are looking to purchase EUR with USD, for example, you might see better rates in the coming months as the US tapering program begins to end. If you are looking to bring money to the UK in the short term then you need to be more cautious. Look to take advantage of any dollar strength, as the USD/GBP rates could worsen if the outlook for early interest rate rises in the UK continues.
For smaller payments such as pension receipts from the US, look for a company who can set up regular payment plans. You will want to go with either a fixed rate for 6 months if you’re concerned about the USD weakening or a floating exchange rate if you feel the rates may improve against the currency of your country of residence.
Regardless of currency direction you should seek to register with a specialist such as USForex who can significantly reduce your transaction costs, help move your money quickly even when you are based outside of the US and assist you in staying up-to-date on the latest news in the currency markets that affect your exchange rates.
David Nicholls is Head of Partnerships at USForex.com. USForex are a Licenced and Regulated Foreign exchange specialist at Federal and State level in 46 of the 50 US States.
If you want to save on your international payments and get preferential rates as a Greenback Expat Tax Services customer, get started right here.
USForex are a fully owned subsidiary of the OzForex Group Limited a listed entity on the Australian ASX stock exchange with globally regulated with offices in Sydney, London, Toronto, San Francisco and HK.