Question

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

Higher relative inflation rate in the following 24 months will be impacting the United States currency NEGATIVELY in the competitive market because it will mean that United States goods will be becoming costlier and they will be becoming less competitive in the foreign exchange market and it will be having a negative impact for the United States dollars and it is going to weekend in order to discount the effect of increasing inflation rate in next few years so it will be influencing the United States dollar in foreign exchange market negatively because the competitiveness of United State goods and services will be falling as, when there would be a high inflation it will mean that there would be a higher goods price and since Other goods are available comparatively lower in respect to the American goods,they will be preferred by the traders and customers and it will be leading to depreciation in United States Dollars due to inflation in economy.

Increase in inflation will be resulting into negative effect for the domestic currency due to decreasing the competitiveness of the goods and services in the international market as they become costlier so it will be having a negative impact for the dollars.