Assume a fixed exchange rate between the U.S. and Country X. If there was an increased demand by Country X for US dollars, explain the action the US government would take to maintain the exchange rate. Assume Country X’s currency is the Xero.
The government regulates exchange rates only indirectly. That's because most exchange rates are set on the open foreign exchange market. In countries like China, where the rate is fixed, the government directly changes the rate. This action of China affects the U.S. Dollarbecause the yuan, the Chinese currency, is loosely pegged to it.
The U.S. government has various tools to influence the U.S. dollar exchange rate against foreign currencies. An independent arm of the government is the nation's central bank, the Federal Reserve. It indirectly changes exchange rates when it raises or lowers the fed funds rate.
For example, if it lowers the rate, that drives down interest rates throughout the U.S. banking system. It also reduces the supply of money. Both of these results make the dollar stronger relative to other currencies. That's because U.S. dollar-denominated credit has become more expensive. At the same time, dollar-denominated assets generate a higher return. Both create more demand for the dollar, while taking it out of circulation. The laws of demand and supply tell you that less supply and more demand drives up the price. When that happens to the dollar, it can purchase more foreign currency on forex markets.
The Chicago Futures Trading Commission regulates the forex brokers. It oversees all U.S. forex brokerage companies, enforces its regulations, and prosecutes outright fraud. Its authority was strengthened in 2010 with the Dodd-Frank Wall Street Reform Act.
Approximately 95 percent of the $5.3 trillion traded daily on forex markets are spot currency transactions, rather than futures transactions. Since they consist of two-day delivery rather than cash, they are considered the same as futures contracts. For this reason, brokers must register as a Commodity Trading Advisor, a Futures Commission Merchant, an Introducing Broker, or a Commodity Pool Operator with the Commodity Futures Trading Commission and become members of the National Futures Association.
The U.S. National Futures Association is a self-regulating association. All U.S. forex brokers operating for other U.S. clients must register. The NFA’s objective is to protect the integrity of U.S. markets and to protect investors from fraud. But it doesn't get involved with the value of any particular currency.
In addition, banks are responsible for most of the trades. The Federal Reserve regulates many of them. For example, in 2013, the Fed required banks to add more liquidity. They began buying Treasurys since they could be sold for cash whenever crisis threatened. The 25 largest banks increased their Treasury holdings by 88 percent in February 2015. It pushed down yields on long-term Treasurys. That strengthened the dollar.
How bonds affect the stock market could depend on how the economy is doing. If the economy slows down, investors may prefer to invest in safer instruments, such as bonds, rather than in the more unpredictable stocks. However, this is not a formulaic response because sometimes stocks and bonds can go up or down in value at the same time.
In addition to the above, the U.S. Treasury Department is also always on the lookout for any price-fixing in forex trading.
Assume a fixed exchange rate between the U.S. and Country X. If there was an increased...
Suppose the exchange rate between the Canadian dollar (CS) and the American dollar (USS) changes from C$1.340/US$ to C$1.325/USS, but the Canadian government wants to maintain a fixed exchange rate of C$1.340/US$. What should the Bank of Canada do? a. Stop trading with the U.S. so that fewer U.S. dollars will flow into Canada. b. Sell U.S. dollars (buy Canadian dollars). c. Sell Canadian dollars (buy U.S. dollars). d. Purchase British pounds and sell French francs.
Suppose the exchange rate...
suppose we have a country w/ fixed exchange rate regime. the country just experienced a natural disaster (SRAS curve shift inward). a) should they devaluate or revaluate their currency to resolve inflation issue? b) what would the country do with its currency?explain and show on graph (w/ exchange rate on y-axis, countries currency in x-axis)
We noted that in 1900, the fixed exchange rate between the British pound and the U.S. dollar was £1 equals $5. What is the exchange rate today? Whose currency has gained the most in purchasing power? What caused this dramatic change in the exchange rate?
1 poin QUESTION 10 Between 1994 and 2005, China pegged the value of the yuan to the dollar at a fixed exchange rate of 8.28 yuan to the dollar (R yis). Over the same period, the United States had a growing bilateral trade deficit with China. What impact did the U.S. trade deficit have on the ability of China to maintain a fixed exchange rate? - The U.S. trade deficit did not have an impact because China's exchange rate policy...
Assume the exchange rate is defined as f/$. What is the real exchange rate? If there is and appreciation of the $, what happens to the price of foreign goods measured in dollars and of US goods measured in the foreign currency? What is the effect on US imports and exports and Y. Explain.
1. Exchange Rate: Suppose the direct foreign exchange rates in U.S. dollars are: 1 British pound = $1.60 1 Canadian dollar = $0.74 Required: a. What are the indirect exchange rates for the British pound and the Canadian dollar? b. How many pound must a British company pay to buy goods costing $8,000 from the U.S. company? c. How many U.S. dollars must be paid for a purchase costing 4,000 Canadian dollars? 2. Changes in Exchange Rates: Upon arrival at...
5. Suppose the current spot exchange rate is $1.17 to €1. The dollar is expected to appreciate to $1.11 to €1 during the next year. (Assume inflation and risk etc. are the same between the Eurozone and the U.S.) (a) What is the expected currency appreciation gain for the dollar? (Give this as a percentage and round to the nearest 0.1%.) (b) Suppose the interest rate on 1-year corporate bonds in the U.S. is 4%. What is the expected total...
If we know the exchange rate between Country A's currency and Country B's currency and we know the exchange rate between Country B's currency and Country C's currency, then we can compute the exchange rate between Country A's currency and Country C's currency. a. Suppose the exchange rate between the Japanese yen and the Canadian dollar is currently ¥106 = $1 and the exchange rate between the British pound and the Canadian dollar is £0.66 = $1. b. Suppose the...
In a fixed exchange rate system, a government intervenes to maintain the value of her currency at a fixed (target) value. Suppose that the equilibrium price (from the foreign exchange market) for the country’s currency is below the target rate that the government is trying to achieve. How should the government intervene in the currency market?
QUESTION 15 It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce inflation. Which of the following is an appropriate action given this scenario? O a Sell dollars for Foreign Currency O b raise interest rates 。c. Lower interest rates od. Buy Dollans with Foreign Currency