Question

The value of the dollar is monitored by bond market participants over time.

a.      Explain why expectations of a weak dollar could reduce bond prices in the U.S.
b.      On some occasions, news of the dollar weakening did not have any impact on bond markets. Assuming that no other information offsets the impact, explain why the bond markets may not have responded to the announcement.

Answer 1

A. Expectation of a weak dollar means that the domestic currency of the United State is expected to depreciate against other foreign currencies. It will have the direct impact on the bond markets because weak dollar means that it can purchase lesser amount of foreign currency related to strong dollar that means that United State consumers will have to pay more for their import from foreign Nations.

This will have a negative impact on the overall bond market as when there is a depreciation in the domestic currency of the United State, it will have the negative impact on the overall bond market sentiment because it will mean that the United States dollars is no more strong against another currency and it will also lower the payment ability of government organisations and corporate organisations.

B.On some occasions the news of weak dollar does not have any impact on the bond markets because people interpret into it that weak dollar also means that the higher amount of exports from the United States because American Dollars have gone weaker and it mean that American goods will be selling cheaper and it will enhance the demand of the American goods into the foreign economy.

Bond markets are relatively forward looking in nature and their discount a lot of forward event so they can interpret that week dollar will lead to higher export from United state and it will lead to higher inflows of foreign currency into the United State economy.