Question

1. Explain why some financial institutions prefer to provide credit in financial markets outside their own country.

2. Explain why a public forecast by a respected economist about future interest rates could affect the value of the dollar today. Why do some forecasts by well‑respected economists have no impact on today’s value of the dollar?

3. Why is trade deficit announcement sometimes has such an impact on foreign exchange trading?

Answer 1

Answer for question (1)

• Financial institutions prefer to provide credit in financial market outside their own country because of following reasons:

Diversification can be one reason behind giving preference to providing credit in financial market outside their own country. Here they can get benefits from different country’s growing economy and healthy financial conditions.

Diversification also helps to reduce country default risk, because by providing credit to foreign financial market they are now dependent on more than one country's economy.

Another reason may be to earn higher interest. By investing in different growing country’s economy one can get benefit of high interest rates prevailing in that foreign country and if there are chances of currency appreciation in future because of strongly growing economy that also can give financial benefits to financial institutions who provides credit in financial market outside their own country.

(Note: As more than one question are given, I have answered for the first question, please put other questions in different post.)