Where is the FX rate headed?

 

You have just been hired by a large US multinational corp.  The firm is trying to decide if it should hedge FX rates and realizes a key determinant is where future spot exchange rates are headed.  It has decided to see what the hire with the latest training from Yale proposes:

 

  1. What are the forward 1 and 2-year rates for the dollar--is the dollar at a forward discount or premium relative to the Euro and Yen? Should forward rates for the dollar be used as an unbiased predictor of the future spot rates for the dollar?

 

  1. Can the firm do better than the forward rate?

 

  1. Is the $ in PPP terms over- or under- valued?

 

  1. What are the explanations for the large current account deficit and capital account surplus?  Is the magnitude of the current and capital accounts large from a historical prospective?
     
  2. How do they affect your view of future movements in the dollar?

 

  1. What role might the increasing government deficits have on the current and capital account and FX rates.

 

  1. If we experience a large unexpected upward movement in U.S. interest rates (as some within the firm think we might), how might the interest rate increases moves affect the dollar?

 

  1. What is your assessment of next year’s $/Euro and Yen/$ FX rate and why?

 

Please turn in one article that you find informative regarding future FX directions