Exchange rates and the Foreign Exchange Market: An Asset Approach - Interest Rates, Expectations, and Equilibrium
3 important questions on Exchange rates and the Foreign Exchange Market: An Asset Approach - Interest Rates, Expectations, and Equilibrium
A rise in the expected future price of euros in terms of dollars leads to:
A raise in the dollar's expected depreciation rate.
When there is an excess supply of dollar deposits:
Euro deposits offer a higher expected rate of return than dollar deposits. The dollar therefore depreciates against the euro until equilibrium.
Changes in the interest rate:
- A rise in dollar interest rates causes the dollar to appreciate
- A rise in euro interest rates causes the dollar to depreciate
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