Sunday, March 02, 2008

Abandoning the U.S. Dollar: A Look at World Interest Rates

Suppose we have a savings account at a bank that is paying 2%. Just down the road are banks offering 4% and 6% for identical accounts. What are we likely to do? All things being equal, we'll pull money from our bank and seek the higher returns of competitor institutions.

So it is in the world money markets. Take a look at government interest rates around the world as of Friday:


U.S. - 1.84% (1.62%)
U.K. - 5.2% (4.07%)
Japan - .57% (.56%)
Germany - 3.96% (3.16%)
Brazil - 11.8% (12.46%)
Australia - (6.72%)

So we have six banks, called U.S., U.K., Japan, Germany, Brazil, and Australia. In a relatively short period of time, the U.S. bank has cut its interest rates to dollar holders to become more like Japan than Europe or Brazil. From that perspective, it's not surprising that dollar holders have fled the currency in favor of the alternatives. After all, why not sell low-yielding dollars in favor of higher yielding currencies and invest in resource-rich areas such as Brazil and Australia--particularly when the management of the U.S. bank is signaling even lower rates ahead?


Identifying Market Themes