3 Ways To Take Advantage Of The Fed's Rate Hikes

 | Jul 26, 2022 12:05

  • The Federal Reserve is set to deliver another .75 point interest rate hike tomorrow—and a few more before the end of the year
  • The largest beneficiary in such a scenario is the US dollar
  • Here are 3 strategies to take advantage of the trend

    • Tomorrow the Federal Reserve will release its highly-awaited July interest rate decision. Jerome Powell’s corresponding press conference will follow shortly, giving investors more clues on the Fed’s plans for the US economy.

    If everything goes as expected, the Fed will repeat the last meeting's 0.75 points hike, bringing the rate to 2.25-2.50%.

    This is probably not the last time we see a hawkish Fed, as rate hikes should proceed through the following meetings. At the next FOMC, in September, we could see another 0.50 or 0.75 point increase, and by the end of the current fiscal year, we could see the federal funds rate exceeding 3.5%.

    It is a rather complicated scenario for the US economy, as the Fed has to be careful to ensure that the cure is not worse than the disease.

    During the past 8 bear markets, the Fed responded to plunging stock prices by lowering interest rates. Yet, this time, it is doing so by hiking them—a backdrop not seen since the 1980s under 12th Fed chairman Paul Volcker.

    The dollar is one of the largest beneficiaries in such a scenario. With that in mind, we devised 3 strategies to take advantage of this fact.

    h2 1. Investing In The Dollar Index (DXY)/h2

    The US dollar index is a measure of the dollar's value in relation to the value of a basket of currencies, among which the most important are, in this order, the euro, the Japanese yen, the pound sterling, the Canadian dollar, the Swedish krona, and the Swiss franc.

    The dollar index was created in 1973 with a price of 100. Therefore, if the index trades at 130, the greenback has appreciated 30% against the basket of currencies. Contrariwise, if the index is at 70, the dollar has depreciated by -30% against the basket of currencies.