If we were to look at a chart plotting U.S. interest rates, U.K. interest rates, and Euro Zone interest rates, we would see a clear pattern: The U.S.’s lead as having the highest interest rates of all the G7 countries is coming to an end.
The Bank of England, with a current bank rate of 5.25%, is expected to raise its trendsetting bank rate to 5.5% by early spring. The Euro Zone just raised its key interest rate to 3.75%, with economists and analysts expecting that rate to go up to 4% by the summer.
While the European Central Bank was quoted as citing various reasons for the raising rates (including the usual inflation worry), I see a different picture of what’s developing. And it’s not a pretty image for the U.S.
Because of its economic woes, the U.S. will need to lower its interest rates soon in order to stimulate the economy. However, if the Federal Reserve takes such a step, the damage on the U.S. dollar will be significant. Why would foreigners (especially the Japanese) buy U.S. T-bills when they can buy bonds from the U.K. and the stable members of the Euro Zone that pay a higher rate of return? The last economic problem the U.S. needs is the euro and pound rising in value against the greenback.
Europe’s central bankers sense what’s happening. They see the U.S. economy softening… they know the U.S. will need to lower its interest rates in order to shore up the economy… they see firsthand how gold prices just continue to rise. And, like vultures, the European central bankers are moving slowly “against” the U.S. dollar.
Could you imagine a world where euros are demanded for oil instead of U.S. dollars? It would be a catastrophe for America. Like a chess game, we might be “checked” to raise domestic interest rates in order to maintain the supremacy of the U.S. dollar as the world’s reserve currency: Another reason why I believe the U.S. economy will not recover any time soon. In fact, these events just add more ammunition to my theory of a severely contracting U.S. economy ahead.