Question

In the dollars per euro foreign exchange market, if both the US central bank and the European central bank lower their interest rates:
A. What will happen to the dollars per euro exchange rate?
B. Will the demand curve for the euro shift and why?
C. Will the supply curve for the euro shift adn why?

Lower interest rates will increase the supply of both the euro and the dollar in the respective economies. But what about demand?

Answer 1

In the dollars per euro foreign exchange market, if both the US central bank and the European central bank lower their interest rates:

Interest rates and exchange rates move in opposite directions.
A. What will happen to the dollars per euro exchange rate?

Dollar will appreciate further as dollar is considered to be more safer option by investors worldwide. When interest rates go down. Investors will invest more in USA considering its credit ratings.

B. Will the demand curve for the euro shift and why?

It is clear that supply of Euros will increase and its demand will shift to left.

C. Will the supply curve for the euro shift and why?

It is clear that supply of Euros will increase and its demand will shift to left. As explained earlier due to investors perception of USA being better investment option.

Lower interest rates will increase the supply of both the euro and the dollar in the respective economies. But what about demand?

Demand for dollars and Euros will also increase depending on demand for goods from them due to their relative depreciation as Both offer better quality goods that world will readily accept.