Go to the St. Louis Federal Reserve FRED database, and find data on the daily dollar exchange rates for the euro (DEXUSEU), British pound (DEXUSUK), and Japanese yen (DEXJPUS). Also, find data on the daily three-month London Interbank Offer Rate (LIBOR) for the United States dollar (USD3MTD156N), euro area (EUR3MTD156N), British pound (GBP3MTD156N), and Japanese yen (JPY3MTD156N). LIBOR is a measure of interest rates denominated in each country’s respective currency.

a) Calculate the difference between the LIBOR rate in the United States and the LIBOR rates in the three other countries for one year ago.

b) Based on the interest rate differentials, would you have expected one year ago that the dollar would depreciate or appreciate with respect to the other currencies?

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c) Report the percentage change in the exchange rates over the past year. Are the results you predicted in part (b) consistent with the actual exchange rate behavior?

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