Why does expansionary monetary policy put a downward pressure on the exchange rate?
If you print money, your money’s worth less.
If you lower the interest rate your money can earn, your money’s worth less.
Simplify the complicated side; don't complify the simplicated side.
Financial Exam Help 123: The place to get help for the CFA® exams
Another way to think about it is in terms of uncovered interest parity.
Expansionary monetary policy = lower interest rates.
When you lower interest rates, your currency is less attractive than other currencies (you can invest in other countries in their local currencies and get a higher return). Demand for foreign currencies rise as a result, and as a result, your currency depreciates.
Join the world’s largest online community of CFA, CAIA and FRM candidates.
No thanks, I don't want to increase my probability of passing.