Euro Slides as Powell’s Hawkish Stance Bolsters US Dollar

EconEye Admin

3 years ago

Fed Chairman Jerome Powell stated that the Fed would not hesitate to raise interest rates if needed. With this news, the U.S. dollar strengthened against the euro.—fxstreet.com

Answer the following questions to check your understanding of the story.

What happens to the U.S. dollar/euro exchange rate when the U.S. dollar strengthens against the euro?

a) 1 dollar buys more than 1 euro

b) 1 dollar buys fewer euros

c) 1 euro buys fewer dollars

d) 1 euro buys more dollars

Wrong! - When the U.S. dollar strengthens against the euro, the U.S. dollar appreciates against the euro and the euro depreciates against the U.S. dollar. What happens to the number of euros that 1 dollar can buy? What happens to the number of dollars that 1 euro can buy?

Well Done! - When the U.S. dollar strengthens against the euro, the U.S. dollar appreciates against the euro and the euro depreciates against the U.S. dollar. 1 euro buys fewer dollars.

Why did Jerome Powell’s statement strengthen the U.S. dollar?

Jerome Powell’s statement strengthened the U.S. dollar because it _____________.

a) raised the expected future exchange rate

b) lowered the U.S. interest rate differential

c) raised the U.S. interest rate differential

d) lowered the expected future exchange rate

Wrong! - What events create an appreciation of the U.S. dollar? Which of these events is Jerome Powell describing in the news clip?

Good Job! - When interest rates rise, the U.S. interest rate differential increases and the U.S. dollar appreciates. Given Jerome Powell’s statement that the Fed would not hesitate to raise interest rates if needed, traders expect future action by the Fed which will increase the future U.S. interest rate differential and the expected future exchange rate. An increase in the future exchange rate strengthens the U.S. dollar exchange rate today.

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