Question

Use the asset market approach to analyse the recent appreciation of the US Dollar. I understand what Asset Market Approach is, however, I am unable to relate it to the recent appreciation in USD. I've seen a few answers, however they did not clear all my doubts. I have a presentation due tomorrow and needs to be prepared for it.

Answer 1

In the foreign exchange market, the exchange rate is determined by using some methods. There are two common approaches for such determination.

1) Asset market approach

2) Goods market approach

What is Asset Market Approach

Asset Market Approach seeks to answer the question -- What is the fair market value of the Asset -- such as real estate, sares, stock or foriegn currency.

This approach values the asset on the basis of selling pric of similar assets in the market.

Asset Market approach and exchange rate determination.

In order to compare international prices of goods and services, exchange rate are used. Exchange rates determination also helps to find International trade imbalance which suggests that countries with current trade surpluses should have an appreciating currency while countries with trade deficits should have depreciating currencies.

Asset Market Approach and appreciate of U.S Dollar.

U.S Currency Appreciation

Appreciation of U.S Dollar means its value increases in relation to another currency that is when a Dollar buys more than what it could buy earlier. Dollar is getting more valuable.

In recent years, the value of U.S Dollar has increased which is in direct relation with the concept of asset market approach.

As asset market approach is a method of determining the value of an asset by comparing similar assets and their selling prices.

This way, the appreciaton of U.S dollar also took place due to the asset market approach under which investor behaviour in asset markets is observed and finally the exchange rate of U.S dollar is determined.

In the nutshell, we can conclude that the appreciation of U.S dollar is the result of curency valuation under asset market approach.

I hope I clear your doubt.