12 How would the impact on the exchange rate differ if the F

12. How would the impact on the exchange rate differ if the Fed were to sell U.S. Treasury securities instead of selling an equal amount (in $ terms) of euros?

Solution

If Fed were to sell U.S. Treasury securities instead of selling an equal amount of euros then the price of the treasury bond would decline and the yield of the bond would increase. This would not be good for U.S. exchange rate. The euro will have a stable exchange rate by purchasing treasury bonds but the exchange rate of dollars would be fluctuating more.