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The question analysts have been toying with, "When will the Federal Reserve finally raise interest rates?" has become more difficult. As the U.S. becomes entangled in a global currency war, will it follow the footsteps of countries across the pond that have recently cut their interest rates? Or, will it proceed with speculations and hike up rates?
Following countries like Australia, Korea and India, which have cut interest rates to weaken currencies and boost exports, this move by China could see more countries, particularly in emerging markets, jump onto the bandwagon in efforts to protect their ability to compete in export markets. Although it is currently unlikely that the U.S. will cut interest rates, it is possible that the Federal Reserve may revise its opinions on an imminent rate hike to avoid the accompanying upward pressure on the U.S. dollar, which could hurt U.S. exports further. Should China continue to weaken the yuan, we could see a drastically overvalued U.S. dollar.
