FEDs Impact On The Value Of Dollar Through Interest Rates

Abstract

In this study we aimed to demonstrate how the actions of FED indirectly impact the value of American dollar. We specifically hypothesized that when FED encourages banks to borrow more from each other by holding the discount rate higher than the federal funds rate then this should have a negative impact on the value of dollar and also subsequent higher spread between federal funds rate and prime rate. We also hypothesized that as this spread gets larger a subsequent depreciation in dollars value and negative effect on unemployment should be observed. Although we were unable to demonstrate the impact when the spread between the prime rate and federal funds rate is considered, our results show that when FED encourages banks to borrow from each other by holding the discount rate higher than the federal funds rate, the American dollar goes down in value and corresponding larger difference between federal funds rate and prime rate is observed.