Editor’s note: Since this post was first published, the first paragraph under the “Looking Forward” subhead has been updated to clarify the expected increase in the speed of FX transaction settlements. (Jan. 25, 2:30 p.m.)
The foreign exchange market has evolved extensively over time, undergoing important shifts in the types of market participants and the mix of instruments traded, within a trading ecosystem that has become increasingly complex. In this post, we discuss fundamental changes in this market over the past twenty-five years and highlight some of the implications for its future evolution. Our analysis suggests that maintaining a healthy price discovery process and fostering a level playing field among participants are areas to watch for challenges. The consequences of the evolution of the FX market—well beyond those anticipated twenty-five years ago—remain active areas of research and policy consideration.
The importance of the U.S. dollar in the context of the international monetary system has been examined and studied extensively. In this post, we argue that the dollar is not only the dominant global currency but also a key variable affecting global economic conditions. We describe the mechanism through which the dollar acts as a procyclical force, generating what we dub the “Dollar’s Imperial Circle,” where swings in the dollar govern global macro developments.
Currency values are important both for the real economy and the financial sector. When faced with currency market pressures, some central banks and finance ministries turn to foreign exchange intervention (FXI) in an effort to reduce realized currency depreciation, thus diminishing its economic and financial consequences. This post provides insights into how effective these interventions might be in limiting currency depreciation.
Have you ever wondered where your dollars go when you spend them? Not in financial terms, but their physical location? Well, there’s an app and a website for that.
It isn’t surprising that the dollar is always in the news, given the prominence of the United States in the global economy and how often the dollar is used in transactions around the world (as discussed in a 2010 Current Issues article).