Question
There is speculation that the U.S. will experience higher relative inflation rates over the following 24 months or longer. Explain fully how this would influence
- There is speculation that the U.S. will experience higher relative inflation rates over the following 24 months or longer. Explain fully how this would influence the USD in foreign exchange markets. Would the dollar be stronger?
The following is a quote from The Economist (Dec. 3, 2016):
"The dollar has been gradually gaining strength for years. But the prompt for this latest surge is the prospect of a shift in the economic-policy mix in America. The weight of investors' money has bet that Mr. Trump will cut taxes and spend more public funds on fixing America's crumbling infrastructure. A big fiscal boost would lead the Federal Reserve to raise interest rates at a faster rate to check inflation. America's ten-year bond yield has risen to 2.3%, from almost 1.7% on election night. Higher yields are a magnet for capital flows."
There has also been Fed attempts to raise interest rates recently.
Will higher US interest rates strengthen the USD? Agree or disagree. Explain fully. Also, will the resulting change in the USD (from your analysis) be consistent with President Trump's overall economic perspective on trade and US manufacturing.
Please address these questions from a Jan. 1, 2017 perspective for that time period.
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