Question

If the Federal Reserve Bank monetary policy committee members implies  that in 2020 there may be less interest rate hikes than expected. How does that affect the currencies of the developing countries? How does that affect the Euro/Dollar parity for 2020?.

Answer 1

Ans:- If the Federal Reserve Bank monetary policy committee memebers implies that in 2020 interest rate will be less hike as expected than the economics growth continue to be lackluster.Price of vegetables will increase day by day.GDP Growth will decrease.

Exchange rates play a vital role in country's level of trade,which is critical to most every free market economy in the world.for this reason exchange rates are among the most watched,analyzed & govrmeentally manipulated economic measures.But exchange rates matter on small scales as well they impact the real return of an investor's portfolio.A lower-valued currency makes a country's imports more expensive and its exports less expensive in foreign markets. A higher exchange rate can be expected to worsen a country's balance of trade, while a lower exchange rate can be expected to improve it.

interest rates, inflation, and exchange rates are all highly correlated. By manipulating interest rates, central banks exert influence over both inflation and exchange rates, and changing interest rates impact inflation and currency values. Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise. The impact of higher interest rates is mitigated, however, if inflation in the country is much higher than in others, or if additional factors serve to drive the currency down. The opposite relationship exists for decreasing interest rates – that is, lower interest rates tend to decrease exchange rates.

The current account is the balance of trade between a country and its trading partners, reflecting all payments between countries for goods, services, interest, and dividends. A deficit in the current account shows the country is spending more on foreign trade than it is earning, and that it is borrowing capital from foreign sources to make up the deficit

According to economic theories, there is a correlation between interest rates and exchange rates. It is called the International Fisher effect. And indeed, in most cases, it is so. Usually, currencies rise and fall according to interest rates of economies. For example, when US interest rates are higher than the European Union ones, the US dollar strengthens versus the euro. Conversely, the higher Eurozone interest rates, make the dollar weaken.

To sum up, it is important to say that the EUR/USD pair is the main pair at the currency market because it gathers two major economies. If traders want to trade it successfully, they should take into account a lot of factors such as sessions during that the pair is traded more, institutions and personalities whose comments and decisions create volatility, political instability, and of course, economic reports that display growth and health of the economy.