Question

Explain how an appreciation of the US$ can be expected to impact economic growth, interest rates and the stock market in the US.

Answer 1

The effects of US Dollar appreciation are :

• Economic growth slows down owing to the fact that the Dollar rises in value against other currencies. Hence, exports become costlier while imports become cheaper. Hence , this negative effect on net exports mean that there is a slowdown in real GDP.
• Since, demand for the US Dollar increases, hence people would want to borrow more. But, with appreciation of US Dollar, purchasing power of the Dollar increases, hence lenders would demand lower interest rates to compensate for the rise in purchasing power of the currency. Hence, interest rates would decrease
• When Dollar rises in value, the price of stocks denominated in dollars decrease.