ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -a. An increase in the U.S. inflation rate will increase the supply of dollars to foreign countries and decrease the demand for dollars in foreign countries, causing the dollar to depreciate. 1. A third factor affect exchange rate is the rate of interest.

Detailed explanation-2: -Interest rates in the United States decrease. If interest rates decrease in the US, people would want to invest more in the EU. The supply of the dollar would increase as people would start exchanging more dollars to get euros to invest in the EU. The increased supply of the dollar would depreciate its value.

Detailed explanation-3: -Declining growth and corporate profits can cause investors to take their money elsewhere. Reduced investor interest in a particular country can weaken its currency. As currency speculators see or anticipate the weakening, they can bet against the currency, causing it to weaken further.

Detailed explanation-4: -Why is the euro falling? Many analysts attribute the euro’s slide to expectations for rapid interest rate increases by the U.S. Federal Reserve to combat inflation at close to 40-year highs. As the Fed raises interest rates, the rates on interest-bearing investments tend to rise as well.

Detailed explanation-5: -Factors that impact the Dollar side of Euro to Dollar: U.S. Gross Domestic Product (GDP) growth rates. Interest rates set by the Federal Reserve (the “Fed”) Money supply set by the Fed. Unemployment rates.