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International finance - interest rates and future strength or weakness of the US dollar.

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Assume that foreign interest rates are expected to rise above US interest rates. What does this suggest about the future strength or weakness of the US dollar?

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Solution Summary

The solution explains the interrelationship between strength of the US dollar, demand for currency and the effect to interest rates and the economy.

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If the foreign interest rates are expected to rise, people in the foreign country then intend to save more money in their bank account. The demand for foreign currency will increase and relatively, the demand for USD will decrease. Obviously, excess supply of USD will bring down its exchange rate.

In the foreign ...

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