Archive for the 'capital account' Category

Apr 25 2007

What’s got the dollar so weak in the knees?

US dollar plummets against euro as ECB rate hike becomes likely — Shanghai Daily | 上海日报 — English Window to China News

“THE US dollar has dropped to a 27-month low against the euro… The United States currency also tumbled to its weakest level against the British pound in 26 years”

What’s happening to the US dollar? The article claims that “interest rate differentials” are causing the weakening of the dollar relative to the Euro and the Pound. How can this be explained? First of all, why is the US Fed predicted to cut rates in the near future?

“The dollar’s losses last week accelerated after a US government report showed that consumer prices excluding energy and food moderated last month. That contrasted with reports from the United Kingdom and New Zealand indicating accelerating price pressure.”

What’s the connection between slowing inflation in the US, accelerating inflation in Europe, falling and rising interest rates, and the exchange rate? At this point in the AP course, you should be able to explain all of these connections.

How can we explain how the following economic trends lead to a weakening of the dollar and a strengthening of European currencies?

“The yield advantage of 10-year Treasury notes over similar-maturity German bunds dropped to 0.47 percentage point last week, the lowest since November 2004. A narrowing yield gap dims the allure of dollar-denominated assets.”

“The economy in the euro zone will grow 2.3 percent this year, beating the 2.2 percent estimate for the US…”

“ECB council member Axel Weber told Handelsblatt newspaper that an ‘extremely positive’ economic outlook meant the bank can’t signal it’s finished raising rates.”

If you can read, understand and explain this article right now, they you probably understand most what what you need to understand from Chapter 38. Let’s hear your comments, folks!

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