Question

Please thoroughly and completely explain how the US dollar might appreciate relative to another currency.

Answer 1

US dollar may be appreciated because of the following reasons-

1. increase in interest rate- If interest rate in the US is increased, saving in the US be more attractive as there is a better rate of return on a savings account. Therefore there will be an inflow of hot money. This will increase the demand for dollar causes the dollar appreciation.

2. lower inflation- If the US has lower inflation than other countries, this makes US goods more competitive against foreign goods. Therefore there will be more demand for US goods and thus more demand for US dollar. This will cause an appreciation of US dollar.

3. The surplus on current account- This causes an inflow of foreign exchange into the US economy. A large current account surplus will cause an appreciation in the exchange rate

4. Higher economic growth- Stronger economic growth tends to cause an appreciation in the exchange rate. Because of higher economic growth interest rate will be increased. And also people will gain confidence because of the better economy. If this growth is export-led US currency will be appreciated.