General Securities Representative (Series 7) Practice Exam

Which of the following is NOT a reason for the devaluing of the US dollar?

1. Large trade deficit with other countries

2. Shifting center of economic activity to fast growing countries

3. Increase in US interest rates

4. US dollar being the underlying backing of all foreign currency

The correct answer is: Increase in US interest rates

An increase in US interest rates is typically associated with a strengthening of the US dollar rather than its devaluation. When interest rates rise, it can attract foreign capital as investors seek higher returns on their investments. This influx of capital can lead to increased demand for the US dollar, thereby supporting or even increasing its value in the foreign exchange market. In contrast, large trade deficits, a shift in economic activity to faster-growing countries, and the dynamics surrounding the US dollar as the underlying backing of foreign currencies can create pressures that lead to a devaluation of the dollar. Trade deficits can result in more dollars flowing out of the country than coming in, weakening the currency. Economic activity shifting towards other nations may lead to decreased confidence in the US economy, thereby impacting the dollar's value negatively. Additionally, if foreign currencies are no longer reliant on the US dollar as a reserve currency, it may lead to reduced demand for the dollar, contributing to its devaluation.