Exchange Rates Moving

by Timothy Taylor, Conversable Economist

Major exchange rates for countries around the world are in the midst of movement that is large by historical standards.

The International Monetary Fund offers some background in its October 2015 World Economic Outlook report, specifically in Chapter 3: “Exchange Rates and Trade Flows: Disconnected?” The main focus of the chapter is on how the movements in exchange rates might affect trade balances, but at least to me, equally interesting is how the movement may affect the global financial picture.

As a starting point, here’s a figure showing recent movements in exchange rates for the United States, Japan, the euro area, Brazil, China, and India. In each panel panel of the figure, the horizontal axis runs from 0 to 36 months. The shaded areas show how much exchange rates typically move over a 36 month period using data from January 1980 through June 2015. The darkest shading for 25th/75th percentile means that exchange rates moved historically within this range from 25-75% of the time. The lighter shading for 10th/90th percentile means that exchange rates move in this area from 10-90% of the time. The blue lines show the actual movement of exchange rates using different but recent starting dates for each country (as shown in the panels). In every case the exchange rate has moved more than the 25th/75th band, and in most cases it is outside the 10th/90th band, too.

As the figure shows, currencies are getting stronger in the US, China, and India, but getting weaker in Japan, the euro area, and Brazil. The IMF describes the patterns this way:

Recent exchange rate movements have been unusually large. The U.S. dollar has appreciated by more than 10 percent in real effective terms since mid-2014. The euro has depreciated by more than 10 percent since early 2014 and the yen by more than 30 percent since mid-2012 … Such movements, although not unprecedented, are well outside these currencies’ normal fluctuation ranges. Even for emerging market and developing economies, whose currencies typically fluctuate more than those of advanced economies, the recent movements have been unusually large.