Interest Rate Chonicles. The Weak Dollar.

The U.S. dollar is weak. That doesn't sound good does it? But Wall Street loves it . . . a weak dollar improves corporate profits by making U.S. goods cheaper to overseas buyers. Companies can also improve profits when they convert sales made in foreign currencies to dollars. Conversely, imports become more expensive.

How does this affect interest rates? Yesterday, Australia's central bank became the first G20 country to raise interest rates. Others may soon follow. This could prompt investors (read China) to sell dollars as they look to put their money into markets where interest rates are rising. The US then would have to raise rates to attract investors to finance our RECORD deficit borrowing.

Wouldn't you love to have the President's job? It would be a hoot to just spend an unlimited amount of money. Whoops, just ran out . . . that's OK, just print some more! (Don't get any ideas, you and I go to jail if we print money). By the way, this is a sure recipe for inflation (yep, inflation also means higher rates).

Ok, so you produce your ALM reports every quarter. Nice work. Keeps the examiners happy, right? But is anyone actually using the reports to form a strategy to reduce interest rate risk? Your ALM results are probably looking pretty good right now, but keep in mind that with interest rates HISTORICALLY low, those rosy numbers are skewed favorably and can change in a hurry. Do a couple of "what if" analysis and you'll see what I mean.

Let's face it, interest rates have no where to go but up, the question is when.With all the other problems plauging the industry, it's easy to take your eye off of Asset Liability Management. But your current problems could look like a walk in the park if you get caught on the wrong side of the rate risk equation.