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Yellen May Just Have Pushed the Dollar Into a Bull Market vs. the Euro

But there is almost no demand for short-term interest rates to rise in the U.S. The commercial banks are sitting on almost $2.7 trillion in excess reserves. It is not expected that the Federal Reserve will remove reserves from the banking system to cause a rise in short-term interest rates.

The effective Federal Funds rate traded last week at around 9 basis points. Over the past year, it has primarily been in the range of 8 basis points to 9 basis points, although it has gotten as low as 6 basis points and as high as 11 basis points.

There is just no demand for funds relatively to the supply of funds that are available.

I don't see the Federal Reserve starting to pushing up rates here any time soon.

The economy is recovering so slowly that the demand for short-term funds will remain low until faster economic growth is achieved in the U.S. This is why the Federal Reserve does not expect short-term interest rates to rise until well into 2015.

Longer-term interest rates were supposed to rise this year and into next, but we have again been surprised by funds flowing into the U.S. Treasury bond market from foreign countries. The flow dropped off in the first quarter of 2013, but it has been rising since. And it's a major reason why longer-term U.S. Treasury rates have not risen as expected this year.

The economics beneath the recent strength of the U.S. dollar against the euro, therefore, seems to be that the U.S. economy, for the near term, will be stronger than the economy of the eurozone. This will eventually cause short-term U.S. interest rates to be higher than short-term eurozone rates. And Yellen seems to recognize that.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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