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In: Economics

Suppose the Federal Reserve Bank unexpectedly raises interest rates in the United States. How will this...

  1. Suppose the Federal Reserve Bank unexpectedly raises interest rates in the United States. How will this impact the foreign-exchange market?
  1. How important are communications and computing technologies to the smooth functioning of the foreign-exchange market? If the technological advances of the past four decades were eliminated-for example, no PCs or satellite telecommunications-how would the foreign-exchange market be affected?
  1. Do you expect the U.S. dollar to maintain its position as the dominant currency in the foreign-exchange market once the euro is fully established? Why or why not?
  1. What would be the impact on world trade and investment if there were only one currency?

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Expert Solution

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Answer:

when the Federal Reserve Bank unexpectedly raises interest rates in the United States then the foreign inflow will increased because of higher interest rate (higher return). It will increase the demand of USD and now USD will appreciate against of other currencies.

We know the foreign exchange market is the biggest market globally in volume and Working 24*7 hours. it is very dynamic in nature.The foreign exchange market is interconnected with each others. We also know the foreign exchange market is derive by market force (by demand- supply force). Its Complicated and large market can not work smoothly without technology. Technology play an important role in foreign exchange market. The world's foreign exchange market has became digitalized and work with the help of technology.  It is a communication network that links the computers of about millions and connected through satellite. All the functions like buying , selling, watching and implementing strategy on right time is not possible without the PCs and satellite. If we were eliminated-for example, no PCs or satellite telecommunications from the foreign exchange market then it will not function smoothly and will very difficult to interconnect it globally. We were not get function of buying , selling, watching and implementing strategy on right time is not possible without the PCs and satellite.

USD is the boss of global foreign exchange market and its share is about 88%. All the central bank keep it as a reserve currency (over 60% of all known central bank foreign exchange reserves.) for maintaining their exchange rate. Gold and crude oil are also measure in USD. The strong USA economy, high trade volume, highest gold reserve are the reason of to maintain its position as the dominant currency in the foreign-exchange market. If the euro is fully established then it will negatively affect the position of USD in global foreign exchange market but in little percentage not more because the reason of o maintain its position as the dominant currency in the foreign-exchange market is very strong.  The European Union's GDP was estimated to be $18.8 trillion (nominal) in 2018, representing against of $20.58 trillion USA in 2018. USA has 8,133.5 metric tons gold reserve that is very larger than EU gold reserve.

A single currency wouldn't be subject to exchange rate fluctuations because there would be no competing currencies to exchange against. A universal currency would lose its value as a commodity bought and sold on open markets and would have value only for its worth in buying other commodities. Economy will not function properly, domestic will lose its value and global economy will damaged badly.

Thank You

Rahul Sunny answered 2 years ago
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