Expect the dollar to appreciate or depreciate against euro

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Reference no: EM131112699

Suppose, initially, the interest rate parity condition holds. Then at some point, U.S. interest rates are 4 percent more than rates in the EU.

(a) Would you expect the dollar to appreciate or depreciate against the euro, and by how much?

(b) If, contrary to your expectations, the forward and spot rates are the same, in which direction would you expect financial capital to flow? Why?

Reference no: EM131112699

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