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session9 - Session 9 Currencies Currencies Globalisation...

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Session 9 Currencies
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2 Currencies & Globalisation Goods markets Financial markets Factor markets Free market pressures gains from trade political change fewer capital controls labour mobility outsourcing
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3 Foreign Exchange Market Top 5 traded currencies % shares of average daily turnover* 2001 2007 US dollar 76% 86% Euro 48% 37% Yen 20% 17% Sterling 15% 15% Swiss franc 7% 7% According to latest BIS survey average daily FX turnover is over $3trn up 71% in 3 years Source: BIS (Dec 2007), Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity * BIS quoted overall total is 200% - why?
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4 Exchange Rate Regimes Source: IMF (2009), “ De Facto Classification of Exchange Rate Regimes and Monetary Policy Frameworks Number of countries Examples Comments Mainly fixed 102 Much of Middle East, Caribbean, LatAm, China US$ is most popular anchor Mainly floating 86 US, Japan, UK, Euro, Canada, India, ANZ African and Asian continents are split between both categories
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5 Regimes & Policy Framework Delegation of monetary policy to anchor currency Fixed rate regime Floating regimes typically use money supply or inflation targets to anchor their overall monetary policy framework
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6 Central Banks & Intervention In a fixed exchange regime, the Bank of England intervenes to hold the sterling exchange rate at $1.50 Price = Exchange rate $/£ Quantity of £ $1.50 Higher demand for sterling countered by BoE selling of £, adding to UK foreign currency reserves. UK money supply rises. Lower demand for sterling countered by BoE buying £, reducing UK foreign currency reserves. UK money supply falls.
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7 Sources of Demand & Supply exchanging goods & services flows affected by exchange rate Current account flows exchanging assets flows highly sensitive to expected returns Financial capital flows Size of capital flows may not reflect capital mobility Elasticity is key
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