Question

We discussed in class about the recent trend of the valuation of major currencies including U.S. dollar. Especially the article from The Economist, “The fate of the dollar will shape financial markets in 2019” presented some ideas on the causes of the recent dollar appreciation and also on some scenarios of possible trend of major currency values in near future. a) (5 points) Explain the possible economic reasons why U.S. dollar appreciated against other major currencies including pound sterling, Euro and Japanese yen in 2018. b) (10 points) The author of the article presents two possible scenarios of dollar depreciation path over the next year or so, depending on the dynamics of three factors – i) Fed’s decision on interest rate, ii) trade dispute between U.S. and China, and iii) Euro-zone economy. Present your thoughts on the currency valuation change (i.e., whether will appreciate or depreciate) and its pace of the relevant economies (i.e., U.S. China, Europe, etc.) in light of those three factors.

Answer 1

( A ) The reasons why U.S. dollar appreciated against other major currencies including pound sterling, Euro and Japanese yen in 2018 is decrease in the supply of US dollars in the international market as compare to Euros and Yens . As, decrease in the supply of the currency leads to an increase in the value of the currency and increase in the demand of the currency in the international market lead to an increase in the value of US dollar in the market as compare to Pound , Euros and Yens .

( B ) Scenarios of dollar depreciation path over the next year or so, depending on the dynamics of three factors –

i ) Fed's decision on interest rate - If Fed takes the decision of increasing the interest rate in the economy then attracts a lot of foreign investors to invest in there country due to which the demand of US dollar will increase . Due to an increase in the demand of the currency it lead to the appreciation of the currency . And due to decrease in the interest rate less investors will try to invest in the country and demand will decrease which lead to the depreciation of dollars in the international market .

ii ) trade dispute between US and CHINA - Due to the dispute between US and CHINA there will be comparatively less demand for dollars in the international market due to which there will be decrease in the value of the currency in the market that means the dollar will depreciate .

iii ) EURO- Zone economy - The euro zone economy means the must demand of Euros in the international market because there is the demand of Euro in around 25 different countries which leads to the Euro zone economy . Due to the presence of Euro zone economy in the international currency market then the demand for dollars will decrease and due to this situation in the currency market dollars will depreciate in the economy .