how far will the dollar adjust? Within the context of a $3-trillion-a-day foreign-exchange market, the very question of the basic value of the greenback is perhaps the single biggest day-to-day issue in the global economy. Given the recent turbulence experienced by the global economy, the size of the U.S. current account deficit, the rate of consumption in China, and the structural impediments to growth in the European Union, the fundamental question of the adjustment of the dollar has become more—not less—important in the basic functioning of the global economy. An economist can primarily focus on how larger macroeconomic changes will affect the value of the euro/dollar in the long run. Yet the larger macroeconomic questions that may affect the valuation of a currency pair over the long run may not be so useful in determining the fair value of a pair over the course of weeks or days, and almost never in the course of a single trading session. Portfolio managers and investors with position horizons of days and weeks cannot wait for long-term theory to “kick in,” and traders must instantaneously digest news, economic data releases, and trade flows. A currency strategist interacts with all three types of market participants both as a consumer of those groups’ information and as a provider of information to those groups. The range of both inputs and demands requires the application of a variety of methods by which to determine the value of the dollar.
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