Question

The Federal Reserve announced a quntitative easing program desinged to lower intermediate and longer-term interest rates.

What effect should this have on the dollar/euro exchange rate?

Answer 1

The quantitative easing program is a technique used by the central banks in order to boost the liquidity in the market. The increase in the money in market reduce down the interest rates in the economy. Now, when the interest rates decline, the yields on the bonds also decline. If these bonds are invested in the US by the European Union countries, then to save their investments, they would sell these bonds which would increase the supply of dollar in the foreign exchange market. The decline in demand along with the increase in supply will cause the dollar to depreciate.So the dollar/euro exchange rate now would increase meaning that more dollars are now needed to buy one euro.