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Chapter 18: Q. 14 (page 495)

Through the summer and fall of 2008, as the global financial crisis began to take hold, international financial institutions and sovereign wealth funds significantly increased their purchases of U.S. Treasury securities as a safe haven investment. How should this have affected U.S. dollar exchange rates?

Short Answer

Expert verified

As a result of the expansion sought after for U.S. dollar-named resources, the dollar should see its value appreciate in contrast to other exchange rates.

Step by step solution

01

Concept Introduction 

Between mid-2007 and mid-2009, the global financial crisis (GFC) referred to a period of high stress in world economic business sectors and banking frameworks.

02

Explanation

As a result of the expansion sought after for U.S. dollar-named resources, the dollar should see its value rise in contrast to other currencies. Because U.S. Treasury securities are priced in dollars, there will be a demand for USD in comparison to other currencies. The dollar exchange rates will appreciate as a result of this.

03

Final Answer 

As a result of the expansion sought after for U.S. dollar-named resources, the dollar should see its value appreciate in contrast to other exchange rates.

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Most popular questions from this chapter

The New Zealand dollar to U.S. dollar exchange rate is 1.38, and the British pound to U.S. dollar exchange rate is 0.65. If you find that the British pound to New Zealand dollar is trading at 0.5, what would be the riskless profit per U.S. dollar invested?

In September 2012, the Federal Reserve announced a large-scale asset-purchase program (known as QE3) designed to lower intermediate and longer-term interest rates. What effect should this have had on the dollar/euro exchange rate?

Go to the St. Louis Federal Reserve FRED database, and find data on the daily dollar exchange rates for the euro (DEXUSEU), British pound (DEXUSUK), and Japanese yen (DEXJPUS). Also find data on the daily three-month London Interbank Offer Rate, or LIBOR, for the United States dollar (USD3MTD156N), euro (EUR3MTD156N), British pound (GBP3MTD156N), and Japanese yen (JPY3MTD156N). LIBOR is a measure of interest rates denominated in each country’s respective currency.

a. Calculate the difference between the LIBOR rate in the United States and the LIBOR rates in the three other countries using the data from one year ago and the most recent data available.

b. Based on the changes in interest rate differentials, do you expect the dollar to depreciate or appreciate against the other currencies?

c. Report the percentage change in the exchange rates over the past year. Are the results you predicted in part (b) consistent with the actual exchange rate behavior?

If the European Central Bank decides to pursue a contractionary monetary policy to fight inflation, what will happen to the value of the U.S. dollar?

In the mid- to late 1970s, the yen appreciated in value relative to the dollar, even though Japan’s inflation rate was higher than America’s. How can this be explained by improvements in the productivity of Japanese industry relative to U.S. industry?
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