As expected, the Federal Reserve announced it would hold its key interest rate steady in the range of 1.00–1.25 percent. But the Fed’s remark that inflation is expected to stay “somewhat below” 2 percent in the near-term spooked the foreign exchange market and the dollar fell.

a. How does the U.S. interest rate influence the U.S. dollar exchange rate, other things remaining the same?

b. How does an expected future change in the U.S. interest rate influence the U.S. dollar exchange rate, other things remaining the same?

c. Explain why the Federal Reserve’s remark about expected future inflation changed expectations about the federal funds rate and how that change influenced the U.S. dollar exchange rate.