In January of this year US equity markets were rattled by signs of a slowdown in growth of the Chinese economy and other emerging markets, collapsing prices of oil and stagnation in most of the Euro zone countries...In response, central banks outside the US have adopted policies which reduce interest rates in their economies. In Japan, Switzerland and in the Euro zone yields on short term treasury bills and on medium term treasury notes are less than 0. However, continued strong growth in employment in the US together with signs of recovery in residential housing and consumer confidence have prompted a rally in US equities in the last five weeks and led the Fed to conclude that the economy is strong enough to withstand two 25 basis point increases in the Federal funds target range this year.
What is the likely impact on the Exchange rate of the $ versus other currencies if the Fed follows through with its plans to raise its Federal Funds Rate target 50 total basis points over the rest of 2016 year?
Given the current condition of the US economy, do you think US policy makers would prefer to see the $ rise in value, decline in value or stay at its current value? Discuss the advantages and disadvantages to the US economy at this time of a stronger vs. a weaker $. Frame your answer in terms of the current Aggregate Demand and Aggregate Supply situation of the US economy.