World Currency Observer
Exchange rates around the world

October 1, 2013 (see October 15 update below)

An episode has just ended in world currency markets. The beginning was on May 22, when US Federal Reserve Chairman Bernanke, in the context of an appearance at a US Congressional committee, briefly made a vague reference to the possibilities regarding when there might be an end of the $85 billion per month purchase by the Fed of US government direct and agency debt (the “tapering” of “quantitative easing” in the United States). This marked the start of four months of downward pressure on world currencies vis-à-vis the US dollar. (The markets found no similar reference in the public statements of high European Central Bank officials, who left no doubt that European monetary policy, in the face of European economic recession, will continue to be expansionary).

The episode ended on Sept 18 with a Fed press release (FOMC) suggesting that, despite the positive economic news for the United States over the previous four months, there were no immediate plans to adjust the pace of bond purchases. The episode was marked by declines in around eighty currencies over the four months, throughout Asia, among former Soviet Union countries, in the African powerhouse which is South Africa, and among the more open of the countries of South America (in most cases, these were on top of declines which had already occurred over the previous year, which was particularly true for South Africa). The exceptions to the downward pressure included the long list of Euro-linked currencies, those countries with relatively closed capital accounts (such as China), and a handful of other countries, notably the United Kingdom and Japan (Japan had already experienced a large depreciation over the year prior to May 22.) Resistance to the downward currency pressure by central banks was characterised by a mixture of technical measures to encourage demand for their currencies and, in some cases, by interest rate increases, of as much as 1.5 percentage points. There was also widespread reconsideration of domestic policies with impact on foreign exchange rates, such as food and energy subsidies. And, a very key set of consequences, which will take some time to assess, is that there were many re-alignments of currencies, as the differences among countries in the four months of currency declines against the dollar was as much as fifteen percent. Some examples of strong currency re-alignments included: the Turkish lira down against Euro-linked currencies; the Indonesia rupiah and the Indian rupee down against the Chinese yuan; and even the New Zealand dollar was up against the Australian dollar. The episode was also marked by sharp movements in traded commodity prices – these were not all linked to the monetary policy episode (although the price of gold was, for sure), but their movement will, through the balance of trade, complicate the impact of changes in relative exchange rates through the balance of trade. So, the 4 month episode is over, but the impact of the downward movements in the currencies will take some time to be absorbed.

October 15, 2013 update

There was an exchange rate event prior to the October 2013 Asia-Pacific Economic Cooperation meeting (which President Obama did not attend this year). There was a written attack on currency manipulation in a letter to the United States Treasury Secretary and the US Trade Representative, signed by 60 of the 100 United States senators (a previous letter making the same point, signed by 230 members of the House of Representatives, was issued in June). The bottom line in the Senate letter is that the Trans-Pacific Partnership agreement (currently under negotiation) and all future free trade agreements should “include strong and enforceable foreign currency manipulation disciplines”. A study referred to in the letter had previously identified eight countries as the worst offenders (China at the top of the list, other countries being Hong Kong, South Korea, Malaysia, Singapore, Taiwan, Denmark and Switzerland), citing large build-ups in foreign exchange reserves as a key test.

An October 4 press release by the Swiss Financial Market Authority read entirely as follows: ” FINMA is currently conducting investigations into several Swiss financial institutions in connection with possible manipulation of foreign exchange markets. FINMA is coordinating closely with authorities in other countries as multiple banks around the world are potentially implicated. FINMA will give no further details on the investigations or the banks potentially involved.” Guesses on what FINMA is targeting centered on the fact that, while the larger Swiss banks are significant participants in world foreign exchange markets, the markets operate 24 hours a day all around the world with hundreds of participants, so there is little question of market power over setting foreign exchange rates for actual transactions. So there was some thought the concern is about manipulation of the daily 4:00 p.m. London fix of exchange rates, an important benchmark for daily measurements used to guide policy and evaluate performance.

(next update: December 2, 2013)