Answer to Question #190808 in Economics for shargeel khan

Question

Productivity levels and prices are among the important determinate of the exchange rates in the long run. Can you explain how changes in prices and productivity levels impact exchange rates in the long run?

Answer 1

The results of central bank meetings always have a significant impact on currency fluctuations. An example is the meetings of the Federal Open Market Committee of the US Federal Reserve System (FRS). The Fed's actions have a significant impact on the American stock market and on the world financial markets in general since The United States is the largest economy in the world. Therefore, the participants are closely watching the changes in interest rates and the operations of the Federal Open Market Committee, as well as the statements of representatives of the Fed, in particular, its current head Jerome Powell.

The Fed's scheduled meetings are held eight times a year (every month and a half). They examine the economic situation in the country, and based on the analysis, further monetary policy is determined, directives are adopted and the level of the lending interest rate for the sale of federal funds Rate and the value of the discount interest rate - Discount Rate (analog of the refinancing rate) are determined. The Minutes of the FOMC is published a few days later.

The basic principle of influencing exchange rates: an increase in the rate contributes to the growth of the national currency (if we are talking about the FRS rate, then the dollar) on the international market. Conversely, in the event of a rate cut, the rate of the national currency is likely to fall as well.

Example. The Fed's rate hike on September 26 led to a depreciation of the euro against the US dollar.