With everything else the same, which of the following would increase the demand for U.S. dollars in the foreign exchange market?
I. a rise in the U.S. interest rate
II. a fall in interest rates in foreign countries
III. a rise in the expected future exchange rate

Question

Quizplus · Accepted Answer

All three options would increase the demand for U.S. dollars in the foreign exchange market. A rise in U.S. interest rates makes U.S. assets more attractive, leading investors to buy more U.S. dollars to invest in these assets. A fall in foreign interest rates makes foreign assets less attractive compared to U.S. assets, again leading investors to prefer U.S. dollars. A rise in the expected future exchange rate of the dollar means investors anticipate the dollar will be stronger in the future, making it more attractive to hold dollars now.

With Everything Else the Same, Which of the Following Would