In an October article, Bloomberg News ran the headline “Most-Accurate Forecaster

Question

In an October article, Bloomberg News ran the headline “Most-Accurate Forecasters Say Dollar Beats QE3.” Surveying ten foreign-exchange forecasters, Bloomberg stated that nine of them expected that the Federal Reserve’s $40 billion-a-month bond purchases will result in a stronger U.S. dollar in 2013. Sean Callow, a senior currency strategist at Westpac Banking Corp., said that the Fed’s expansionary monetary policy is only “a short-term negative for the U.S. dollar.” Which of the answer choices best explains the reason that the forecasters expect little damage from the Fed’s policy actions?

A. U.S. gross domestic product is forecast to expand 2.1 percent in 2013 after growing 2.2 percent this year. That compares with a predicted 0.4 percent expansion in the euro area and 1.2 percent for Japan. Relatively higher GDP growth in the U.S. mitigates the impact of rising inflation, resulting in higher returns on investments in the U.S.

B. Interest rates in emerging economies, such as India, Russia, and Mexico, will likely remain above those in the U.S. The Reserve Bank of India’s 8 percent interest rate, Central Bank of Russia’s 8.25 percent interest rate, and Banco de México’s 4.5 percent interest rate are well above the 0.25 percent interest rate set by the U.S. Federal Reserve.

C. In September, the European Central Bank (ECB) decided to buy the bonds of member countries, substantially reducing the risk that indebted countries, such as Greece and Spain, would leave the euro area by the end of 2013. With the added stability provided by the ECB, investors are expected to demand euros well into next year.

D. The U.S. faces a “fiscal cliff” of $1.2 trillion in mandated spending cuts and tax increases starting January 1 if Congress does not agree by December 31 on ways to reduce the U.S. budget deficit. The U.S. Treasury Department is expected, however, to issue government bonds to finance a fourth straight year of budget deficits designed to increase economic activity.

Explanation / Answer

The most likely reason for a not so much impact over dollar of the monetary expansion is:-

option (A).This is because though due to a monetary expansion interest rates in US would decline.However a strong growth momentum as compared to other major economies would provide a positive impetus to dollar and it would lead to a stronger dollar vis a vis currencies of other countries.

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