The Federal Funds Target Rate has been residing within the 0.00% – 0.25% range for all of 2009 thus far. The Federal Reserve has maintained this target range with the hopes of providing additional credit opportunities to allow for economic stimulus.  

This, in turn, has had a negative impact on bond yields and the value of the U.S. dollar. To understand the impact on Treasury Bonds, consider the following 12 Month Treasury average (“12MTA”) index which represents the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year.

As the chart above illustrates, not only is the Federal Funds Target Rate at historically low levels but so too are 12 Month Treasury Average Rates. To understand the impact of these low interest rates on the U.S. Dollar, let’s look to the Exchange-traded Product (“ETP”) marketplace for potential guidance.

While not a perfect representation of the foreign exchange market, the above foreign exchange ETPs can serve as a sufficient proxy to understand how each underlying currency is trading relative to the U.S. Dollar. On this basis, one can reasonably conclude from the chart above that the U.S. Dollar has fallen versus each of the foreign currencies listed with particular downward  momentum developing over the course of the last six months ending September 30, 2009.

Absent any significant changes in interest rate policies across the globe in the next 3-6 months, we do not see any of the trends discussed in this posting reversing anytime soon as the Federal Reserve will likely continue to provide stimulus to the economy through low interest rates while also attempting to keep inflation in check.

We would suggest that the inflationary consequences associated with not beginning to implement a systematic monetary tightening policy program soon will only intensify as each week and month passes.