During the period 2001–2004, the U. S. Federal Reserve lowered nominal interest rates on the dollar by more than the European Central Bank (ECB) did on the euro, a move that most market participants viewed as temporary. What was the effect on the dollar-euro exchange rate?

The correct option is A such that the Dollar depreciated against the Euro.

Explanation:

As the options are not given in the question, they are found online and are as below:

A) The dollar depreciated against the euro.

B) The dollar appreciated against the euro.

C) There was no change in the dollar-euro rate because expectations adjusted.

D) There was no change in the dollar-euro rate because real interest rates were unchanged.

The correct option is A such that the Dollar depreciated against the Euro.

This is because the US Federal Reserve lowered the interest rates lower than the European Central Bank which led to the depreciation in the dollar rate against the euro.

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