Final answer:
If U.S. assets are seen as having greater risk relative to foreign assets, this should cause the supply of dollars to increase and the demand for dollars to decrease, leading to a depreciation of the U.S. dollar in the foreign exchange market.
Step-by-step explanation:
When U.S. assets are perceived as having greater risk relative to foreign assets, this condition is typically associated with a decrease in their attractiveness to investors. As a result, we should expect the supply of dollars to increase in the foreign exchange market, because investors would be more likely to sell off U.S. assets and seek opportunities elsewhere, resulting in them offering more dollars for sale. Conversely, the demand for dollars would decrease, as fewer investors are willing to purchase dollars to acquire U.S. assets.
In summary, if investors assess that holding U.S. assets entails a higher risk, they are more likely to divest from those assets, opting for alternatives in different currencies. This divestment puts downward pressure on the value of the dollar, leading to a depreciation of the dollar in the foreign exchange market compared to other currencies, such as the euro or pound.