Final answer:
Yes, expectations of a future stronger exchange rate affect present exchange rates by leading to immediate adjustments. Investors buying or selling a currency based on these expectations create a self-fulfilling trend, impacting exchange rates in the short term.
Step-by-step explanation:
The expectation of a stronger exchange rate in the future does indeed affect the exchange rate in the present. When investors anticipate that a country's currency will strengthen, they tend to act on that belief by buying the currency, which results in immediate appreciation. This immediate response can cause a chain reaction, leading other investors to buy more of the currency in anticipation of further appreciation or vice versa if there is an expectation of devaluation. This behavior indicates that expectations can cause self-reinforcing effects on exchange rates.
Moreover, in the short term, speculation based on expectations of future exchange rates and differences in rates of return across countries heavily influences the currency markets. High interest rates may attract foreign investment and strengthen a currency, while low rates may lead to a weaker currency as investors look for better returns elsewhere. Hence, expectations lead to immediate exchange rate adjustments.