Barclays Capital Interview Question

If the Fed hikes rates by 50 bps and the ECB holds it as is, what happens to EURUSD?

Sales and Trading Analyst: Round 1

3 answers

3
votes

As interest rates rise in US, there becomes more demand for US dollars for the higher return, so USD will appreciate compared to EUR (simple supply demand), therefore EURUSD will decrease.

2
votes

Simple answer: EURUSD depreciates; USD strengthens against EUR.

Better answer: As interest rates in the U.S. rise, buying EUR byfunding in USD becomes increasingly more expensive. So, as cost of carry rises, market players will unwind long EUR positions driving EURUSD lower. In other words, USD appreciates against EUR.

1
votes

simple interest rate parity:

forward exchange rate = current exchange rate * (1+R(foreign))/(1+R(domestic))
Domestic v Foreign increases, the forward rate decreases.

Answer the Question:

© 2010 interviewspy.com · privacy policy ·
Name:

Comment: