Depreciation of the U.S. Dollar: Causes and Effects

Factors Influencing U.S. Dollar Depreciation

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Question

Which one of the following will most likely cause a depreciation in the U.S. dollar on the foreign exchange market under a system of flexible exchange rates?

Answers

A. a sudden increase in the demand for California cabernet wines by Europeans

B. an increase in real interest rates among European nations

C. a switch from French stocks and bonds to U.S. stocks and bonds by U.S. speculators

D. rampant inflation in Japan, a major trading partner of the U.S.

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Explanations

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A. B. C. D.

An increase in real interest rates abroad will cause the demand for high yield assets in those countries to increase. As a result the demand for assets in the U.S. will fall, as will the demand for U.S. currency. The U.S. dollar will depreciate under falling demand.

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