“During the second half of 2014, the U.S. dollar made significant gains against all other major...

“During the second half of 2014, the U.S. dollar made significant gains against all other major global currencies, such as the British pound, Swiss franc, Euro and Japanese yen.” (CNN Business, Jan 5th, 2015) You are working as a foreign exchange trader and your manager has raised the following questions for you to answer

What could the European Central Bank (ECB) have done that might have stopped the fall in the Euro?

Solutions

Expert Solution

1) European central bank is responsible for managing Euro.lts the sole issuer of Euro coins and currency. In order to save Euro from falling ECB adopted the following measures

* ECB decided engage in Quantitative easing to stave off deflation.

* The program of quantitative easing included

> portfolio balance channel ( A reduction in sovereign bond yields ,tilting investor incentives towards riskier assets.)

> Reducing liquidity premia and lending by liquidity constrained banks.

>Raising asset prices to lift consumer wealth

> Improve the cost competitiveness of Euro area.

Although European central bank's decision to implement quantitative easing was anticipated. Markets responded to the announcement in January and to the first bond purchase under the program in March with a sharp Euro depreciation, which was reversed later.

In short, ECB has done whatever it could to save Euro in 2014.

Rahul Sunny answered 1 month ago

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