Question

How will lower Federal Funds rate affect the value of the dollar if inflation rates don’t change? How will lower rates change the value of the dollar if all countries banks lower rates?

Answer 1

ANSWER-

The lower Federal Rates would surely affect the inflationary situation of the country as it will lower the cost of borrowing so people will shift towards spending instead of savings. This will create an inflationary pressure after few days in the economy. Along with this effect, when the Federal Rates go down, it will make investors sell their dollar denominated assets due to lower returns and purchase foreign denominated assets, which in turn, will depreciate the value of dollars as compared to other currencies.

If all other countries do the same thing viz., lower their rates, then the the value of dollars gets impacted in the same way but with less proportion as compared to a situation where only US lowers it's rates.