As we buy assets, investors are likely to substitute the lower risk assets we buy with riskier assets such as longer-term assets, equities and possibly real estate. This has well-known effects on interest rates across the curve, on the cost of capital, on wealth – via higher equity and real estate prices – and therefore on balance sheets more generally.
The period near the end of the 1990s saw investors become increasingly optimistic - some have said irrationally exuberant - about the prospects for the U.S. economy. The associated financial flows into the United States helped to drive up the U.S. dollar over this period - at the expense of other currencies, including the Canadian and Australian dollars, the euro, and the yen.