Bretton Woods Agreement
Sealed by the Second World War allies in NH in the US, when they agreed to lock their currencies to the US dollar. The US dollar
... [Show More] was in turn convertible into gold at a price of $35 per ounce, with gold available on demand from Fort Knox
In the wake of the Vietnam War, the US economy stagnated and this attempt to lock currencies ended when Nixon unilaterally announced in 1971 to end the convertibility of the dollar to gold
Who trades currencies
Financial Investors
Corporations
Travelers
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FX reserves
A huge stack of cash with which to manipulate the supply of and demand for a currency and therefore manipulate its value
Black Wednesday
ERM crisis under Major in 1992 where Britain could not keep up with the strict fixed rate of exchange and on the 16th September were forced to leave the ERM - later called White Wednesday as it freed up Britain's economy
Triangular Arbitrage
currency transactions are conducted in the spot market to capitalize on a discrepancy in the cross exchange rate between two currencies
Locked exchange rates
are not set in stone but are government aspirations
Floating Currencies
move against one another in a matrix; kept in check by triangular arbitrage
U.S. Dollar
the world's reserve currency and most heavily traded currency
Change in value of one currency pair
only tells us the relative value of those two currencies. It does not tell us the general trend against all other currencies
Trade weighted baskets
indices which calculate the aggregate value of one currency against its main trading partners; larger partners are weighted more heavily
Three of the Main Currency Drivers
Surprise changes in interest rates
Surprise changes in inflation
Surprise changes in trade
When a central bank unexpectedly decreases interest rates
the currency weakens; the government bond yields go down
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Surprise rises in inflation
weaken a currency
When a country exports goods
the foreign buyer needs to buy the currency of the exporter
When a country imports good
the importer needs to buy the currency of the foreign seller by selling the home currency
If net exports is positive
country has a trade surplus and it will drive demand for the home currency (and the opposite is true)
Big Mac Index
uses the prices of Big Macs around the world compared to the price in the US as a proxy for currency valuation
The value of a currency is
relative not absolute
in the long run what drives currency values
law of one price
Central banks target
inflation directly in order to ensure price stability
Abenomics
Prime Minister Abe's attempt to break the cycle of deflation
Standard inflation target
2% [Show Less]