Exchange rates

Valentina Bruno, Hyun Song Shin, 27 July 2021

The strength of the US dollar in currency markets has drawn the attention of researchers, policymakers, and businesses for decades. This column examines the effects of the dollar on international trade, with a particular focus on exports. A strong dollar dampens trade volumes through the financial channel, outweighing any improvement in trade competitiveness. Trade activity is strong when the dollar is weak, but global trade suffers when the dollar is strong.

Georgios Georgiadis, Helena Le Mezo , Arnaud Mehl, Cédric Tille, 26 July 2021

The US dollar has a dominant role in currency invoicing of global trade, covering around 40% of international transactions, followed by the euro and the renminbi. This column analyses the effects of economic fundamentals and government policies on currency invoicing patterns. Strategic complementarities and integration in global value chains are both important determinants of dollar and euro invoicing in trade with the US and the euro area, while the establishment of currency swap lines by the People’s Bank of China has been associated with increases in renminbi invoicing, with an adverse effect on dollar use. 

Takatoshi Ito, Satoshi Koibuchi, Kiyotaka Sato, Junko Shimizu, Taiyo Yoshimi, 23 July 2021

The currency a firm chooses to invoice in reveals lessons on the prominence of that currency in the international sphere. This column presents survey data from Japanese overseas subsidiaries, highlighting how the use of Asian currencies has been growing steadily. The authors show that among Asian local currencies, Chinese renminbi and Thai baht are the most used currencies by Japanese subsidiaries. If these countries become increasingly important destination markets for regional countries, local currencies will be used more as trade invoice currency in Asia.

Enrique Alberola, Carlos Cantú, Paolo Cavallino, Nikola Mirkov, 12 July 2021

Textbook models predict that a monetary policy tightening should lift the exchange rate. Yet the empirical evidence for emerging market economies fails to support this prediction. This column uses data from Brazil to show that the exchange rate’s response to monetary policy shocks changes with the fiscal regime. A contractionary monetary surprise leads to an appreciation in normal times. By contrast, a depreciation results when fiscal fundamentals are deteriorating and markets worry about debt sustainability. 

Giovanni Cespa, Antonio Gargano, Steven Riddiough, Lucio Sarno, 17 June 2021

The extent that trade volume can reveal asymmetric information among foreign exchange market participants is the subject of debate among economists, as are the questions surrounding how the dispersion of information can affect currency returns. This column presents new evidence that foreign exchange volume reveals insights into both issues. The authors find that a high level of information asymmetry exists across foreign exchange market participants, and that this asymmetry is independent of currencies’ average level of liquidity, volatility and volume.

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