The latest on the dollar’s international currency status

Jeffrey Frankel 06 December 2013

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As most people know, the general trend in the dollar’s role as an international currency has been slowly downward since 1976. International use of the dollar as a currency in which to hold foreign-exchange reserves, to denominate financial transactions, to invoice trade, and to serve as a vehicle for foreign-exchange transactions is below where it was during the heyday of the Bretton Woods era (1945-1971). However, few are aware of what the most recent numbers show.

It is not hard to think of explanations for the downward trend:

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Topics:  International finance

Tags:  euro, reserve currency, dollar, foreign exchange, yuan

Monetary policy in Latin America: Where are we going?

Christian Daude 10 December 2012

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Inflation targeting has served countries in Latin America well . They have achieved macroeconomic stability by reducing inflation and the pass-through of external shocks such as oil price and exchange rate fluctuations (cf. Mishkin and Schmidt-Hebbel 2007).

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Topics:  Macroeconomic policy Monetary policy

Tags:  inflation targeting, Latin America, Central Banks, foreign exchange, Brazil, Chile, Mexico, Colombia, Peru

The foreign exchange market: Not as liquid as you may think

Loriano Mancini, Angelo Ranaldo, Jan Wrampelmeyer 03 September 2012

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With an estimated average daily trading volume of $4 trillion, the foreign exchange (Forex) market is by far the world’s largest market (Bank for International Settlements 2010). Due to this size, market participants commonly regard foreign exchange as highly liquid at all times – liquid in the sense that you can buy or sell very large sums quickly and without turning the price against yourself by much.

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Topics:  International finance

Tags:  foreign exchange, Forex

Getting beyond carry trade: What makes a safe-haven currency?

Maurizio Michael Habib, Livio Stracca 30 January 2011

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We all “know” that some currencies are safe havens in crisis times – take the Japanese yen or the Swiss franc. But do we know why? And does the dollar belong to this list?

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Topics:  International finance

Tags:  carry trade, foreign exchange, currencies, safe haven currency

Carry on speculating on the volatility of foreign exchange

Pasquale Della Corte, Lucio Sarno, Ilias Tsiakas 26 January 2011

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The standard “carry trade” is a popular currency speculation strategy that invests in high-interest currencies by borrowing in low-interest currencies. This strategy works well if, for example, spot exchange rates are unpredictable. There is ample empirical evidence pointing in that direction or, in academic jargon, showing that exchange rates follow a random walk (Meese and Rogoff 1983). In this case, investors engaging in carry trading will on average earn the difference in interest rates without having to worry about movements in exchange rates.

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Topics:  Frontiers of economic research International finance

Tags:  carry trade, speculation, foreign exchange, investing

The $4 trillion question: What explains FX growth since the 2007 survey?

Dagfinn Rime, Michael R King 23 December 2010

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In April this year, 53 central banks and monetary authorities participated in the eighth Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity (BIS 2010). The 2010 Triennial shows a 20% increase in global foreign exchange (FX) market activity over the past three years, bringing average daily turnover to $4 trillion (Table 1 and Figure 1, left panel).

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Topics:  Financial markets International finance

Tags:  foreign exchange

Lessons for the foreign exchange market from the global financial crisis

Michael Melvin, Mark P. Taylor 06 November 2009

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The timing of the subprime crisis, which became the global crisis, is well known; see, for example, New York Fed (2009). The impact on the foreign exchange markets has been much less discussed.

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Topics:  Exchange rates International finance

Tags:  global crisis, foreign exchange, FX markets

Can we understand the recent moves of the euro-dollar exchange rate?

Anton Brender, Emile Gagna, Florence Pisani 21 July 2009

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Trying to forecast foreign exchange rates is challenging. Understanding their past behaviour is not much easier. In this respect, the bumpy road followed by the dollar against the euro during the last two years seems to be no exception. Nonetheless, a look at Figure 1 gives some interesting clues. It compares the rate of the euro in dollars and the difference in 3-month rates on the two currencies expected at a one year rolling horizon. Until last year, the two variables appear to have been strongly correlated. This should not be a complete surprise.

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Topics:  Exchange rates

Tags:  euro, dollar, foreign exchange, risk aversion

Why foreign exchange transactions did not freeze up during the global financial crisis: The role of the CLS Bank

Richard M. Levich 10 July 2009

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Administration officials have once again put the need for new trading systems for complex derivatives on the front burner. Officials are right to be concerned, as many new financial products represent contracts between two counterparties – banks, brokerage houses, insurance companies, and hedge funds, among others – without the benefit of a centralised exchange or clearinghouse. These bilateral deals develop in a “shadow banking system.” When institution A trades with B and institution A’s credit standing takes a hit, there is a direct impact on institution B.

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Topics:  Financial markets International finance

Tags:  foreign exchange, Clearinghouse, settlement bank, CLS Bank

Policymakers must prevent financial institutions from becoming too connected to fail

Jorge A. Chan-Lau, Marco A. Espinosa-Vega, Kay Giesecke, Juan Solé 02 May 2009

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How should governments handle large and complex financial institutions that are “too big to fail” and “too connected to fail”?

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Topics:  Financial markets

Tags:  foreign exchange reserves, IMF, currency crisis, Too big to fail, too connected to fail, foreign exchange, exchange rate

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