And other individuals and firms found the United States to be a very attractive place in which

To make financial investments. This increase in the demand for American financial assets meant an

Increase in the supply of British pounds, German marks, Japanese yen and others, and the dollar

Therefore appreciated in value.

e) Speculation. Suppose it is widely anticipated that the European economy will (a) grow faster

Than the American economy, (b) experience more rapid inflation than the American economy, and

(c) have lower future real interest rates than in the US. All these expectations would lead one to

Believe that in the future the Euro will depreciate and, conversely, the dollar will appreciate. Hence,

Holders of the Euro will attempt to convert them into dollars, increasing the demand for dollars.

This conversion, of course, causes the Euro to depreciate and the dollar to appreciate, because

Speculators act on the supposition that these changes in currency values will probably happen.

In practice, if the economic development vector of the USA and the European Union change,

Then everything concerning exchange rate relationship will occur quite on the contrary. This relationship

Came into being in the first half of 2003 when the Euro rate rose greatly in relation to the dollar.

Flexible Rates and the Balance o f Payments (Part II)