Nov 07 2014

The dollar’s recent rise and determinants of exchange rates – October to November 2014

Published by at 1:48 pm under Exchange Rates,Interest rates,Trade

In the last couple of months the exchange rate of the US dollar against the currencies of many of its trading partners has been rising steadily. The charts below show the value of the dollar in terms of Japanese Yen and Euro in the last month.

Euro per dollar Yen per dollar

 

The reasons for the rise in the dollar are simple and illustrate some of the determinants of exchange rates that we learn about in our IB Economics classes. Listen to a recent story from APM’s Marketplace radio show about the dollar’s recent rise, then answer the questions that follow.

Discussion Questions: 

  1. Discuss with your class how each of the factors mentioned in the podcast help explain the recent rise in the value of the US dollar against other major currencies:
    • “Recovery”
    • “Yields”
    • “Interest rates”
  2. Why might the rising dollar…
    • help developing countries?
    • help American consumers?
    • hurt American producers?
  3. Using your knowledge of macroeconomics, discuss and explain the following claim: “the impact of more expensive exports and cheaper imports may be to stifle inflation just enough to make the Fed slow down any rate increases, which would in turn slow down the dollar’s rise.”
  4. Using diagrams for the market for US dollar in Europe and for the Euro in the United States, and referring to one of the determinants of exchange rates mentioned in the story, illustrate the rise in the dollar’s value against the Euro over the last month and the corresponding fall in the Euro’s value against the dollar. Use values from the chart above on to determine the appropriate exchange rate values for your graphs.
  5. Explain how each of the following interventions could be used to devalue the dollar, assuming the US government or Federal Reserve Bank decided the dollar’s appreciation posed a threat to the US recovery:
    • monetary policy (Fed)
    • official reserves (Fed)
    • exchange controls (US government)

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

Comments Off on The dollar’s recent rise and determinants of exchange rates – October to November 2014

Comments are closed at this time.