Investors from Germany, the United States, and the United Kingdom frequently invest in each other's currencies based on prevailing interest rates. If British interest rates increase, German investors are likely to buy ____ dollar-denominated securities, and the euro is likely to ____ relative to the dollar.

Question

Quizplus · Accepted Answer

When British interest rates increase, investors might find British assets more attractive, potentially reducing their investments in other currencies, including the dollar. This could lead to a depreciation of the dollar relative to the euro, as demand for the euro increases compared to the dollar, making the correct answer that German investors are likely to buy fewer dollar-denominated securities, and the euro is likely to appreciate relative to the dollar.