Which of the following events would most likely result in an appreciation of the U.S. dollar?
A) U.S. inflation is very high.
B) The Fed indicates that it will raise U.S. interest rates.
C) Future U.S. interest rates are expected to decline.
D) Japan is expected to increase interest rates in the near future.

Question

Quizplus · Accepted Answer

When the Fed indicates that it will raise U.S. interest rates, it makes U.S. dollar-denominated investments more attractive to foreign investors. This increased demand for the dollar will lead to an appreciation of the currency's value. High U.S. inflation (option A) typically leads to a depreciation of the dollar, as it decreases the purchasing power of the currency. Option C, a decline in future U.S. interest rates, would also likely result in a depreciation of the dollar as it would make U.S. dollar-denominated investments less attractive. Option D, Japan increasing interest rates, could potentially lead to a strengthening of the yen but would have a negligible effect on the U.S. dollar.

Which of the Following Events Would Most Likely Result in an Appreciation