Question

Monitoring Central Bank Intervention1) How can your business be affected if the Fed attempts to strengthen the dollar in the for-eign exchange market?2) If the Fed decides to weaken the dollar, how will your business be affected?3) How can indirect central bank intervention affect your business even if there is no impact on exchange rates?

Answer 1

Answer:

1) if the FED decides to strengthen then dollar, it will make US exports more expensive and imports cheaper. That will cause net exports to decrease, i.e. there will be less exports and more imports.

A strengthening of the US dollar helps importing companies because they will buy cheaper goods from abroad and will be able to sell them at higher domestic prices. On the other hand, exporting companies will be hit because hey loss competitiveness since their products will be more expensive.

2) If the FED decides to weaken the US dollar, the opposite will happen. Exporting companies will be favored, while importing companies will be hurt. The country will start to export more and import less.

3) Generally, the FED intervenes market through its money supply policy. When the interest rate increases or the money supply increases, the value of the US dollar will tend to lower. Even if expansionary monetary policy doesn't have an immediate impact, the expectations do matter. If people expect a devaluation of the US dollar, they will start to buy foreign currencies, which in turn will end up devaluating the US dollar. It is a self-fulfilled prophecy.

Another way the FED impacts businesses is through the interest rate. Lower interest rates will increase both domestic and foreign investment in the US.