![]() As a consequence, the spread between German and US 10-year yields fell from -1.76% in October to -1.95% in November to -2.24%. The election also led US interest rates to move up sharply as market participants expected President Trump’s economic policies to raise growth and inflation. It is natural to start by looking at the exchange rate and the spread between interest rates in the US and in the euro area.įigure 1 US dollar–euro rate and German–US 10-year spreadįigure 1 shows that following the election of President Trump in November 2017, the dollar appreciated from $1.10 per euro in October to $1.08 in November, and further to $1.05 in December. (2017) that the dollar–euro exchange rate is particularly difficult to forecast out-of-sample.1 This in-sample analysis is interesting in light of the conclusion of Cheung et al. ![]() What might explain the unexpected behaviour of the dollar–euro exchange rate? In this column I argue that these movements are almost entirely explained by changes in two interest rate spreads. That is a source of concern, given the central role of the US dollar in the international economy (Boz et al. ![]() Following the election of President Trump, it was generally expected that the new administration’s economic policies – which would include infrastructure investment, tax reform (and reduction), and deregulation – would lead to an appreciation of the US dollar. The depreciation of the US dollar against the euro since early 2017 has led to much puzzlement among market commentators, central banks, and financial institutions. ![]()
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