EECS 1710 Lecture 8: EECS 1710 Lecture 8 Notes
24 Jun 2018
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EECS 1710 Lecture 8 Notes
Introduction
Impact of Favorable Expectations
The interaction of various factors that can affect exchange rates will be discussed in
more detail once the other factors that could influence a currency’s demand or supply
schedule are identified.
Government Controls
A fourth factor affecting exchange rates is government controls.
The governments of foreign countries can influence the equilibrium exchange rate
Imposing foreign exchange barriers
Imposing foreign trade barriers
Intervening (buying and selling currencies) in the foreign exchange markets
Affecting macro variables such as inflation, interest rates, and income levels
EXAMPLE
Recall the example in which U.S. interest rates rose relative to British interest rates.
The expected reaction was an increase in the British supply of pounds for sale to obtain
more U.S. dollars (in order to capitalize on high U.S. money market yields).
However, if the British government placed a heavy tax on interest income earned from
foreign investments, such taxation would likely discourage the exchange of pounds for
dollars.
Expectations
A fifth factor affecting exchange rates is market expectations of future exchange rates.
Like other financial markets, foreign exchange markets react to any news that may have
a future effect.
News of a potential surge in U.S. inflation may cause currency traders to sell dollars
because they anticipate a future decline in the dollar’s value.
Document Summary
The interaction of various factors that can affect exchange rates will be discussed in more detail once the other factors that could influence a currency"s demand or supply schedule are identified. A fourth factor affecting exchange rates is government controls. The governments of foreign countries can influence the equilibrium exchange rate. A fifth factor affecting exchange rates is market expectations of future exchange rates. News of a potential surge in u. s. inflation may cause currency traders to sell dollars because they anticipate a future decline in the dollar"s value. This response places immediate downward pressure on the dollar. Interaction of various factors that can affect exchange rates will be discussed in more detail once the other factors that could influence a currency"s demand or supply schedule are identified. Governments of foreign countries can influence the equilibrium exchange rate. Intervening (buying and selling currencies) in the foreign exchange markets. Affecting macro variables such as inflation, interest rates, and income levels.
