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Exchange rates during financial crises

  • Marion Kohler

Exchange rate movements during the global financial crisis of 2007-09 were unusual. Unlike in two previous episodes - the Asian crisis of 1997-98 and the crisis following the Russian debt default in 1998 - in 2008 a large number of currencies depreciated sharply even though they were not at the centre of the crisis. Moreover, during 2009, the crisis-related movements reversed strongly for a number of countries. Two factors likely have contributed to these developments. First, during the latest crisis, safe haven effects went against the typical pattern of crisis-related flows. Second, interest rate differentials explain more of the crisis-related exchange rate movements in 2008-09 than in the past. This probably reflects structural changes in the determinants of exchange rate dynamics such as the increased role of carry-trade activity.

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Article provided by Bank for International Settlements in its journal BIS Quarterly Review.

Volume (Year): (2010)
Issue (Month): (March)
Pages:

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Handle: RePEc:bis:bisqtr:1003f
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  1. Gabriele Galati & Alexandra Heath & Patrick McGuire, 2007. "Evidence of carry trade activity," BIS Quarterly Review, Bank for International Settlements, September.
  2. Robert N McCauley & Patrick McGuire, 2009. "Dollar appreciation in 2008: safe haven, carry trades, dollar shortage and overhedging," BIS Quarterly Review, Bank for International Settlements, December.
  3. Christopher J. Neely, 2005. "Using implied volatility to measure uncertainty about interest rates," Review, Federal Reserve Bank of St. Louis, issue May, pages 407-425.
  4. Robert R. Bliss & Nikolaos Panigirtzoglou, 2004. "Option-Implied Risk Aversion Estimates," Journal of Finance, American Finance Association, vol. 59(1), pages 407-446, 02.
  5. Ranaldo, Angelo & Söderlind, Paul, 2009. "Safe Haven Currencies," CEPR Discussion Papers 7249, C.E.P.R. Discussion Papers.
  6. Melvin, Michael & Taylor, Mark P., 2009. "The crisis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1317-1330, December.
  7. Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
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