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Chapter 12: Problem 9

What methods do currency forecasters use to predict future changes in exchange rates?

Short Answer

Expert verified
Currency forecasters predict future changes in exchange rates through methods such as fundamental analysis, technical analysis, sentiment analysis, and geopolitical analysis.

Step by step solution

01

Fundamental Analysis

Currency forecasters use several methods to predict future changes in exchange rates. Fundamental analysis is one of these, which includes evaluating the overall economic indicators of a country, such as GDP growth, inflation, political stability, and trade and fiscal policies. These indicators paint a picture of the economic health of a country and can influence the value of a country's currency.
02

Technical Analysis

The second method is technical analysis. It relies on the study of past market data mainly price and volume to forecast future price trends. This analysis uses various graphical tools, charts, trend lines, support and resistance levels, and mathematical indicators like moving averages. They believe that historical price patterns tend to repeat and based on this they predict future changes in exchange rates.
03

Sentiment Analysis

The third method is sentiment analysis which analyses the market psychology or sentiment. Sentiment analysts will look on several indicators to see how the market participants feel about the prospects for a currency pair. These analysts believe that participants' emotions (i.e. emotions of traders and investors) strongly influence the exchange rates.
04

Geopolitical Analysis

The fourth method is the geopolitical analysis. It's about how geopolitical events could impact the currency exchange rates. This could include political elections, the outbreak of war, change in government policy, natural disasters etc.

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Most popular questions from this chapter

Assuming market-determined exchange rates, use supply and demand schedules for pounds to analyze the effect on the exchange rate (dollars per pound) between the U.S. dollar and the U.K. pound under each of the following circumstances: a. Voter polls suggest that the U.K.'s conservative government will be replaced by radicals who pledge to nationalize all foreign-owned assets. b. Both the U.K. and U.S. economies slide into recession, but the U.K. recession is less severe than the U.S. recession. c. The Federal Reserve adopts a tight monetary policy that dramatically increases U.S. interest rates. d. Britain's oil production in the North Sea decreases, and exports to the United States fall. e. The United States unilaterally reduces tariffs on U.K. products. f. Britain encounters severe inflation, while price stability exists in the United States. g. Fears of terrorism reduce U.S. tourism in the United Kingdom. h. The British government invites U.S. firms to invest in British oil fields. i. The rate of productivity growth in Britain decreases sharply. j. An economic boom occurs in the United Kingdom that induces the U.K. consumers to purchase more U.S.-made autos, trucks, and computers. k. Ten percent inflation occurs in both the United Kingdom and the United States.

Suppose that the dollar/franc exchange rate equals \(\$ 0.50\) per franc. According to the purchasing- power-parity theory, what will happen to the dol- lar's exchange value under each of the following circumstances? a. The U.S. price level increases by 10 percent and the price level in Switzerland stays constant. b. The U.S. price level increases by 10 percent and the price level in Switzerland increases by 20 percent. c. The U.S. price level decreases by 10 percent and the price level in Switzerland increases by 5 percent. d. The U.S. price level decreases by 10 percent and the price level in Switzerland decreases by 15 percent.

Explain how the following factors affect the dollar's exchange rate under a system of market-determined exchange rates: (a) a rise in the U.S. price level, with the foreign price level held constant; (b) tariffs and quotas placed on U.S. imports; (c) increased demand for U.S. exports and decreased U.S. demand for imports; (d) rising productivity in the United States relative to other countries; (e) rising real interest rates overseas, relative to U.S. rates; (f) an increase in U.S. money growth; and (g) an increase in U.S. money demand.

In a free market, what factors underlie currency exchange values? Which factors best apply to long and short-run exchange rates?

Identify the factors that account for changes in a currency's value over the long run.
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