23 Forecasting Latin American currencies. The value of each Latin American currency relative to the euro is dictated by supply and demand conditions between that currency and the dollar. The values of Latin American currencies have generally declined substantially against the euro over time. Most of these countries have high inflation rates and high interest rates. The data on inflation rates, economic growth, and other economic indicators are subject to error, as limited resources are used to compile the data.

a If the forward rate is used as a market-based forecast, will this rate result in a forecast of appreciation, depreciation, or no change in any particular Latin American currency? Explain.

b If technical forecasting is used, will this result in a forecast of appreciation, depreciation, or no change in the value of a specific Latin American currency? Explain.

c Do you think that UK firms can accurately forecast the future values of Latin American currencies?

Explain.