Question

If exports increased to Canada and imports from Canada to the US also increased, without any other changes in the US and Canada's economies, then what would happen to the US Dollar exchange rate to the Canadian Dollar? Explain. Justify your answer.

Answer 1

In the international market, two or more countries make economic trade with each other, which affect the value of their currencies in foregin exchange market. A currency will appreciate when its demand exceeds its supply in the market. In contrast, a currency will depreciate if its supply exceeds in the market.
Here, US exports to Canada increases, it will lead to increase the demand for US dollar by Canadian consumers due to which increased demand for US dollar will appreciate its value in the market. At the same time, US imports from Canada also increases; it will lead to increase the supply of US dollar in the market that lead to dpreciate the US dollar. As a result, an appreciation followed by depreciattion will result in no change in exchange rate.

Note- There can be slightly upward or downward movement of exchnage rate, which depends upon whether the increase in demand for dollar is more or the supply of US dollar.