Question

For the case of the US, EURO, Remnimbi, Sterling or Japan

a) Explain the major factors behind exchange rate fluctuations over the past two years?

b) What do you think will happen to the exchange rate over the next year and why?

Answer 1

Part A

US Dollar

The primary factor behind the exchange rate fluctuations is the growth rate of the US economy and the interest rate differentials. Also, there is the problem for current account deficit and budget deficit also occur.

Euro

The major problem for the Euro for the last two year is the political instability that existed in the Euro area.

Renminbi

The primary issue for this currency is US-China trade politics and trade-related issues.

Yen

The Japanese Yen also have to fluctuate for the last two years. The primary factor is the global bond yields. The risk-averse behavior in terms of selling of US equities and Italian bonds are the major factor affecting them.

Sterling

The problem for pound sterling is the increased optimism with the EU.

Part B

The US dollar, Renminbi, Euro, pound sterling have the neutral exchange rate expecting for the coming years, and Japanese Yen become overweight. Because in the longer term, the Yen would be the safer currency and counterbalance to risk asset.