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Chapter 2: The balance of payments and the foreign exchange market
1- Exchange rates and international transactions
Currency Overview
• Asia 5:42 a.m. EDT 03/30/10
Last (bid) Prior Day †
Australian Dollar (in dollars) 0.9194 0.9172
Hong Kong Dollar 7.7640 7.7633
Indian Rupee 45.100 44.823
Indonesian Rupiah 9085 9091
Japanese Yen 92.50 92.46
Malaysian Ringgit 3.2670 3.2680
Singapore Dollar 1.3979 1.3996
South Korean Won 1130.00 1135.46
Taiwanese Dollar 31.790 31.786
Thai Baht 32.310 32.352
† Late Monday in New York.
• Europe & Others 5:47 a.m. EDT 03/30/10
Last (bid) Prior Day †
Euro (in dollars) 1.3462 1.3481
Czech Republic Koruna 18.8690 18.8500
Denmark Krone 5.5268 5.5218
Norwegian Krone 5.9766 5.9559
Polish Zloty 2.8776 2.8785
Russian Ruble 29.4400 19.4990
Swedish Krona 7.2610 7.2516
Swiss Franc 1.0631 1.0624
U.K. Pound (in dollars) 1.5060 1.4984
Egyptian Pound 5.5018 5.5030
Israeli Shekel 3.6975 3.7064
South African Rand 7.3961 7.4129
† Late Monday in New York.
• Europe & Others 5:55 a.m. EDT 03/30/10
Last (bid) Prior Day †
Argentine Peso 3.8655 3.8730
Brazilian Real 1.7944 1.7973
Canadian Dollar 1.0181 1.0208
Mexican Peso 12.4285 12.4425
† Late Monday in New York.
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Key Currency Cross Rates: 6:00 a.m. EDT 03/30/10
Dollar Euro Pound SFranc Peso Yen CdnDlr
Canada 1.0182 1.3718 1.5354 0.95840 0.08202 0.01101 ---
Japan 92.480 124.60 139.46 87.048 7.4498 --- 90.827
Mexico 12.414 16.725 18.720 11.685 --- 0.13423 12.192
Switzerland 1.0624 1.4314 1.6021 --- 0.08558 0.01149 1.0434
U.K. 0.66313 0.89344 --- 0.62418 0.05342 0.00717 0.65128
Euro 0.74223 --- 1.1193 0.69863 0.05979 0.00803 0.72896
U.S. --- 1.3473 1.5080 0.94127 0.08056 0.01081 0.98213
(Source: Thomson Reuters) http://online.wsj.com/mdc/public/page/mdc_currencies.html?refresh=on The real euro/dollar exchange rate, denoted q, is the euro price of the American basket relative to that of the euro area: q = (E x P$)/P€ (2-1) The nominal effective exchange rate:
NEERi = ∑j=1,j≠i
n
ωj.Eji (2-2a)
where, NEERi = (nominal) effective exchange rate of currency i, Eji = nominal exchange rate of currency i with respect to currency j,
ωj = weight given to currency j in the construction of the index; by definition the sum of weights equals one. The real effective exchange rate:
REERi = ∑j=1,j≠i
n
ωj.qji (2-2b)
where, NEERi = (nominal) effective exchange rate of currency i, qji = real exchange rate of currency i with respect to currency j,
ωj = weight given to currency j in the construction of the index; by definition the sum of weights equals one.
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(Source: BIS, Quarterly review, March 2010)
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Graph 2:
(Source: BIS, Quarterly review, March 2010)
Graph 3:
(Source: BIS, Quarterly review, March 2010)
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Currency Futures, Tuesday, March 30, 2010 Mar 30 10:31:32 GMT • All quotes are in Greenwich Mean Time • Euro – CME Month Last Chg Open High Low Volu
me OpenInt Excha
nge Date Time
June 10 1.34770 0.00130 1.34760 1.35380 1.34540 95133 220634 CME 03/30/10 10:21:31
Sept 10 1.34880 0.00200 1.34900 1.35270 1.34710 73 1815 CME 03/30/10 09:24:25
Dec 10 1.34970 0.00340 1.34970 1.34970 1.34970 1 83 CME 03/30/10 02:50:08
Mar 11 1.34650 2 CME 03/29/10 21:00:42
http://online.wsj.com/mdc/public/page/2_3028.html?category=Other&subcategory=Currency&contract=Euro%2520-%2520cme&catandsubcat=Other%7CCurrency&contractset=Euro%2520-%2520cme 3. The balance of payments as the net demand for foreign currency
Table 2-1: Comparing euro rates of return on dollar and euro deposits
Euro interest rate
Dollar interest rate
Expected rate of euro depreciation against dollar
Rate of return difference between euro and dollar
deposits
Case R€ R$ (Ee€/$ - E€/$)/E€/$ R€ - R$ - (E
e€/$ - E€/$)/E€/$
1 0.04 0.02 0.00 0.02
2 0.04 0.02 0.02 0.00
3 0.04 0.02 0.04 -0.02
4 0.04 0.05 0.02 0.01
The uncovered interest parity condition between dollar and euro deposits shows that the equality between the two assets’ expected rates of return measured in euros: R€ = R$ + (Ee - E)/E (2.5)
Table 2-2: Today’s euro/dollar exchange rate and the expected euro return of dollar
deposit when Ee = per dollar
Euro exchange rate, direct
terms
Interest rate on dollar deposits
Expected rate of depreciation of euro
against dollar
Expected euro return on dollar deposits
Case E R$ (0.77 - E)/E R$ + (0.77 - E)/E
1 0.81 0.02 -0.049 -0.029
2 0.79 0.02 -0.025 -0.005
3 0.77 0.02 0.000 0.020
4 0.75 0.02 0.027 0.047
5 0.73 0.02 0.055 0.075
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Figure 2-2: Relation between current exchange rate and expected euro return in dollar deposits
0,68
0,7
0,72
0,74
0,76
0,78
0,8
0,82
-0,029 -0,005 0,02 0,047 0,075
Expected euro return in dollar deposits
Tod
ay's
eu
ro
/do
lla
r e
xch
an
ge r
ate
The covered interest parity condition can be written R€ = R$ + (F – E)/E (2-7) with F the one-year forward price of dollars in terms of euros.
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4. Exchange rates regimes
De Facto Classification of Exchange Rate Regimes and Monetary Policy Frameworks
Data as of April 31, 2008
The classification system is based on the members' actual, de facto arrangements as identified by IMF staff, which may differ from their officially announced arrangements. The scheme ranks exchange rate arrangements on the basis of their degree of flexibility and the existence of formal or informal commitments to exchange rate paths. It distinguishes among different forms of exchange rate arrangements, in addition to arrangements with no separate legal tender, to help assess the implications of the choice of exchange rate arrangement for the degree of independence of monetary policy. The system presents members' exchange rate regimes against alternative monetary policy frameworks in order to highlight the role of the exchange rate in braod economic policy and to illustrate that different exchange rate arrangements can be consistent with similar monetary frameworks. The following explains the categoreis.
Exchange rate anchor
The monetary authority stands ready to buy or sell foreign exchange at given quoted rates to maintain the exchange rate at its predetermined level or within a range (the exchange rate serves as the nominal anchor or intermediate target of monetary policy). These regimes cover exchange rate regimes with no separate legal tender, currency board arrangements, fixed pegs with or without bands, and crawling pegs with or without bands.
Monetary aggregate target
The monetary authority uses its instruments to achieve a target growth rate for a monetary aggregate, such as reserve money, M1, or M2, and the targeted aggregate becomes the nominal anchor or intermediate target of monetary policy.
Inflation targeting framework
This involves the public announcement of medium-term numerical targets for inflation, with an institutional commitment by the monetary authority to achieve these targets. Additional key features include increased communication with the public and the markets about the plans and objectives of monetary policymakers and increased accountability of the central bank for its inflation objectives. Monetary policy decisions are guided by the deviation of forecasts of future inflation from the announced inflation target, with the inflation forecast acting (implicitly or explicitly) as the intermediate target of monetary policy.
Other
The country has no explicitly stated nominal anchor, but rather monitors various indicators in conducting monetary policy. This is also used when no relevant information on the country is available.
http://www.imf.org/external/np/mfd/er/2008/eng/0408.htm
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The exchange rate of the Deutschemark againt the US dollar and the French Franc – 1953 - 1998
0
0,5
1
1,5
2
2,5
3
3,5
4
4,51953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
US
D 1
= D
EM
...
0
10
20
30
40
50
60
70
80
90
FR
F 1
00 =
DE
M..
.
Source: Bundesbank (Exchange rates on the Frankfurt exchange)
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The annual rate of appreciation of the Deutschemark against the US dollar and the French Franc – 1954 – 1998
-30
-20
-10
0
10
20
30
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
USD 1 = DEM …
FRF 100 = DEM …
Source: Bundesbank (Exchange rates on the Frankfurt exchange)
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Annual rate of appreciation of the euro against the British Pound, the Japanes Yen and the US dollar (%)
-0,2
-0,15
-0,1
-0,05
0
0,05
0,1
0,15
0,2
0,25
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
USD
JPY
GBP
Source: Bundesbank
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Implied PPP
0,4
0,5
0,6
0,7
0,8
0,9
1
1,1
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
FRA
DEU
GBR
(Source : WEO, October 2009)
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Effective exchange rate, 1995 - 2010
-0,1
-0,05
0
0,05
0,1
0,15
0,2
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
France
Germany
United Kingdom
United States
Euro area
(Source: OECD, March 2010)
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