Question

We discussed in class about the recent trend of the valuation of major currencies including U.S. dollar.
Especially the article from The Economist, “The fate of the dollar will shape financial markets in 2019”
presented some ideas on the causes of the recent dollar appreciation and also on some scenarios of
possible trend of major currency values in near future.
a) (5 points) Explain the possible economic reasons why U.S. dollar appreciated against other major
currencies including pound sterling, Euro and Japanese yen in 2018.
b) (10 points) The author of the article presents two possible scenarios of dollar depreciation path over
the next year or so, depending on the dynamics of three factors – i) Fed’s decision on interest rate,
ii) trade dispute between U.S. and China, and iii) Euro-zone economy. Present your thoughts on the
currency valuation change (i.e., whether will appreciate or depreciate) and its pace of the relevant
economies (i.e., U.S. China, Europe, etc.) in light of those three factors.

Answer 1

The appreciation of the dollar since March 2018 is due to the rapid rise in interest rates and the tax reform in the United States.

Tax cuts, spending increases, and deregulation helped lift US economic growth to an annualized rate of more than 4% in the second quarter, at a time when many other countries are losing economic momentum. Even if it’s just a temporary boost, it’s been enough to make the dollar a more appealing place to park funds than the alternatives.