Question

Explain in a paragraph, There is speculation that the U.S. will experience higher relative inflation rates over the following 24 months or longer. Explain fully how this would influence the USD in foreign exchange markets. Would the dollar be stronger?

Answer 1

• The rate of inflation in a country can have a major impact on the value of the country 's currency and rates of foreign exchange it has with the currencies of other nations. However ,inflation is just one factor among many that combine to influence a country's exchange rate.
• Inflation is more likely to have a significant negative effect rather than a significant positive effect,on a currency value and foreign exchange rate. A very low rate I inflation does not guarantee a favorable exchange rate for a country ,but an extremely high inflation rate is very likely to impact the country exchange rate with other nation negatively.
• The ultimate determination of the value and exchange rate of a nations currency is the perceived desirability of holding that nation currency. That perception is influenced by a host if economic factors such as the stability of a nations government and economy.
• If U.S experience a relatively high inflation rate then the buying power of its currency is eroding which will tend to discourage anyone from wanting to acquire or to hold the currency .
• So higher inflation rates have negative effects on the value of a currency. The currency become weaker compared to other currencies which means it buys less of other currencies.
• A higher inflation rate reduces the value of currency. Inflation suggest a rise in prices,which makes the goods and services of a nation less competitive in global markets........ Interest rate differential : higher interest rate attract foreign inflow,boosting the currency and vice versa.