Foreign Exchange

Foreign Exchange

Q 1:

The value of the U.S dollar has declined these days as evidenced by the 2017 U.S dollar index. The currency has weakened in comparison to the other major world currencies.

Q 2:

The major factors that influence the value of the U.S dollar include the interest rates, employment outlook, trade balance, central bank actions, economic growth expectations, inflation rates and the political situation (Bade & Parkin, 2015). Other factors include forex market factors such as speculation and traders’ sentiments.

Q 3:

Traders, investors and banks are the main parties that demand the U.S dollar. The U.S dollar is the main currency used in international financial transactions. Therefore, traders, investors and banks need the currency to make transactions. Furthermore, many banks use the U.S dollar as a reserve currency.

Q 4:

Traders supply the U.S dollars in the respective markets by buying, selling or borrowing the currency to make various business transactions.

Q 5:

Our demand for euros goes up when we purchase German products because we need the German currency to buy products from Germany. Therefore, a trader will need to exchange his U.S dollars for the euros in order to purchase goods from Germany.

Q 6:

According to Thomas (2013), freely floating exchange rates are rates determined by the demand and supply of the currencies in the forex market. Therefore, the government has no control over the forex exchange rate.

Q 7:

A falling U.S dollar will increase my travel expenses if I am traveling to a foreign country with a stronger currency relative to the U.S dollar. This increase in the travel expenses will occur because I will need more dollars to buy one unit of the stronger currency.

Q 8:

A cheap dollar relative to the currencies of other nations is bad for U.S imports. U.S importers will incur additional costs to buy products from the countries with the stronger currencies in comparison to the U.S dollar.

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