If foreign exchange traders expect the dollar to depreciate in the short run but the economic fundamentals suggest that it will appreciate:
A) the dollar is likely to depreciate in the short run.
B) the dollar is likely to appreciate in the short run.
C) no change in value of the dollar is likely.
D) the change in the value of the dollar cannot be predicted.

Question

Quizplus · Accepted Answer

Expectations of traders can have a significant immediate impact on currency values, often outweighing fundamentals in the short term. If traders expect the dollar to depreciate, their actions (like selling dollars) can lead to a self-fulfilling prophecy, causing the dollar to depreciate in the short run despite longer-term fundamentals suggesting appreciation.

If Foreign Exchange Traders Expect the Dollar to Depreciate in the Short