Question

Analyze the implications of currency appreciation and depreciation for Globalization, and explain how the weakening of the U.S. dollar will make U. S. companies more attractive to foreign investors.

Answer 1

Answer:-

Currency appreciation and depreciation have a direct impact on the flow of foreign direct investment into a country. If a country has a devalued currency then investing in that country is more attractive for investors abroad. So if the dollar is devalued for instance then foreigners will be able to get more of their currency for every dollar and so will want to invest in US companies. The state of the currency will also depend on the interest rates being set by the Federal Reserve, a higher interest rate will cause an appreciation of the currency and so investing in the country will not be as attractive as before. A depreciated currency will thus have a more positive effect on globalization as it allows the attraction of foreign direct investment from abroad. A weakening of the US dollar will thus be positive for the balance of payments as it will attract foreign investments from abroad and bolster the capital account and also increase exports and hence improve the balance of trade.