Foreign exchange question?

Question

I invested in German bonds, they are currently paying higer interest rates than U.S. T-bonds, the ECB lowers interest rates to stimulate the European economy, how will my investment fare?

Answer 1

Rising interest rates cause a currency (against other currencies) to appreciate because it draws investments to that country. Conversely, falling interest rates will tend to depreciate the currency.

Right now the EUR/USD rate is about 1.32, in other words, one Euro will buy USD 1.32. If the Euro depreciates (EUR/USD goes down) to, let's say 1.25, then the Euro will only buy USD 1.25. Internationally, that $1.25 would be more valuable than $1.25 was before an ECB rate decrease but when you retrieve the money from Germany, you have less than you expected (1.25 instead of 1.32).

Answer 2

Its price will rise in euros and euros will fall against the dollar. Although it is crude and doesn't work well, you could test the sensitivity of the dollar-euro relationship to interest rate changes against the bond-interest rate change sensitivity and see which is more sensitive. You could make money or lose money depending upone which relationship is more sensitive.

Answer 3

well i would honestly suggest talking with an internation brooker on this one if your on your own keep track of the stock market if your not doing do already, daily showing of currance is shown in the stock market and in papers and online