Final answer:
The fall in U.S. interest rates will lead to the depreciation of the USD due to decreased demand and increased supply. Conversely, the Peso will appreciate because of increased demand and reduced supply in Mexico where the interest rates remain stable. Option D is the correct answer.
Step-by-step explanation:
If interest rates fall in the United States but do not fall in Mexico, the short-run impact is likely to depreciate the value of the U.S. dollar (USD) and appreciate the value of the Mexican Peso (Peso). Lower U.S. interest rates make U.S. assets less desirable compared to those in Mexico, because investors seek higher returns.
Consequently, we should expect to see a decrease in demand for dollars and an increase in the supply of dollars in foreign currency markets. This will lead the dollar to depreciate. On the other hand, stable interest rates in Mexico compared to the falling rates in the U.S. make Mexican assets more attractive, increasing the demand for the Peso and decreasing its supply. As per the principles of supply and demand, this increased demand and reduced supply will result in the appreciation of the Peso.
Several reference figures illustrate how expectations about future exchange rates can influence current demand and supply. For instance, when the exchange rate for the Peso is expected to strengthen, investors are more likely to hold onto their Pesos and even acquire more, in anticipation of this appreciation. This increase in demand and decrease in supply cause the Peso's value to rise immediately. Conversely, if a currency like the USD is expected to depreciate, there's an increase in supply and a decrease in demand, leading to its depreciation.
Therefore, the correct answer to the question is: d USD = Depreciate / Peso = Appreciate.