Tuesday, September 2, 2014

Dollar strengthens on expectations of US interest rate rise

Two reasons for this:

1. Investors sell euros to buy dollars to invest in the US to take advantage of the higher US rates. 
2. US borrowers borrower in foreign currency to take advantage of the lower foreign rates, and then sell the foreign currency to buy dollars to invest in the US.  This is called the "carry trade."

Both factors increase the demand for dollars in the market for foreign exchange which raises the "price" of a dollar, the exchange rate.

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