Question

Which of the following statement describes an UNLIKELY event if there is a persistent surge of the U.S. dollar against other major currencies?

a. Foreign borrowers’ debt service burden will be decreased if they had borrowed long-term dollar-denominated debt in the years before the surge.

b. U.S. exporters will lose price competitiveness in foreign markets if they adopt complete exchange rate pass-through.

c. The dollar surge will increase the dollar’s purchasing power abroad.

d. U.S. exporters will lose earnings in dollars if they adopt pricing to markets.

Answer 1

If there is a persistent surge of the US dollar against other major currencies, it means the US dollar is appreciating and the value of the US dollar per unit of other country currency increases.

a. Foreign borrowers’ debt service burden will be decreased if they had borrowed long-term dollar-denominated debt in the years before the surge.

This statement describes an UNLIKELY event. If a borrower had borrowed dollar denominated debt before the surge, his debt service burden will increase as the dollar surge results in increase in corresponding equivalent domestic currency while he repays te borrowing. Thus, for 1 USD of loan, the borrower has to pay more of his domestic currency resulting in increased debt service burden.

b. U.S. exporters will lose price competitiveness in foreign markets if they adopt complete exchange rate pass-through.

This statement describes a LIKELY event . If the US dollar surges and if the US exporter adopt complete exchange rate pass through, it will result in the product getting exported expensive in the international or other foriegn market. The US products will be more expensive than the other country or domestic products and hence will lose the price competitiveness.

c. The dollar surge will increase the dollar’s purchasing power abroad.

This statement describes a LIKELY event . A surge in US dollar increases its value with respect to other currency. Thus for every one US dollar surge, it will be able to purchase more of the foreign currency and thus resulting in increase in the purchasing power of the dollar in foreign country.

d. U.S. exporters will lose earnings in dollars if they adopt pricing to markets.

This statement describes a LIKELY event . If the US dollar surges and if the US exporters adopt complete exchange rate pass through, it will result in the product getting exported expensive in the international or other foriegn market. The US products will be more expensive than the other country or domestic products and hence will lose the price competitiveness. To make the products competitive, sometimes US exporters adopt pricing to markets whereby they adjust thier prices to the prevailing prices in thier export markets. This implies reducing the price of export in U S dollar and thus result in US exporters losing earnings in dolalrs.