A "currency" rate involves the price of the base currency (e.g., the dollar) quoted in terms of another currency (e.g., the yen), or in terms of a basket of currencies (e.g., the dollar index). The world's major currencies have traded in a floating exchange rate regime ever since the Bretton-Woods international payments system broke down in 1971 when President Nixon broke the dollar's peg to gold. The two key factors affecting a currency's value are central bank monetary policy and the trade balance. An easy monetary policy (low interest rates) is bearish for a currency because the central bank is aggressively pumping new currency reserves into the marketplace and because foreign investors are not attracted to the low interest rate returns available in the country. By contrast, a tight monetary policy (high interest rates) is bullish for a currency because of the tight supply of new currency reserves and attractive interest rate returns for foreign investors.
The other key factor driving currency values is the nation's current account balance. A current account surplus is bullish for a currency due to the net inflow of the currency, while a current account deficit is bearish for a currency due to the net outflow of the currency. Currency values are also affected by economic growth and investment opportunities in the country. A country with a strong economy and lucrative investment opportunities will typically have a strong currency because global companies and investors want to buy into that country's investment opportunities. Futures on major currencies and on cross-currency rates are traded primarily at the CME Group.
Dollar - The dollar index traded sideways in the first half of 2014 but then rallied very sharply starting in August, closing the year up +13.2%. The dollar index rallied further in early 2015 and posted a new 11-1/2 year high. The dollar index rallied sharply in 2014 as the Fed progressively tapered its third quantitative easing program (QE3) and then ended the program altogether in October 2014. By contrast, the Bank of Japan (BOJ) expanded its QE program during 2014 and the European Central Bank (ECB) during 2014 saw increased pressure that finally resulted in a QE announcement in January 2015. The Fed's tighter monetary policy than the ECB or BOJ was a powerful bullish factor for the dollar. In addition, the markets are expecting the Fed to start raising interest rates way before either the ECB or BOJ. The dollar in 2014 also saw support from the better performance of the U.S. economy relative to the economies of its competitors. Although the U.S. GDP growth of +2.4% in 2014 was rather tepid, it was much better than the Eurozone's GDP growth rate of +0.8% in 2014 and Japan's zero growth rate.
Euro - EUR/USD edged to a 3-year high of $1.40/euro in May 2014 but then proceeded to plunge through the remainder of the year and into early 2015, posting an 11-1/2 year low in January 2015. EUR/USD closed 2014 down -12.0% at $1.21/euro. EUR/USD plunged in the latter half of 2014 when it became clear that the U.S. Federal Reserve would end its QE3 program in October 2014 while the ECB was coming under increasing pressure to implement a large-scale quantitative easing (QE) program. The ECB in January 2015 finally announced a large-scale QE program involving the purchase of 60 billion euros of sovereign bonds per month, totaling at least 1.1 trillion euros. The ECB implemented two interest rate cuts in 2014 that brought ECB's refinancing rate down to a negligible 0.05% by September 2014. The ECB was forced to cut rates and implement a QE program in response to the weak Eurozone economy and increased deflation risks. The Eurozone economy in 2014 recovered to only +0.8% after negative GDP growth rates in 2012-13 caused by the Eurozone sovereign debt crisis. Meanwhile, the Eurozone CPI in January 2015 fell into deflationary territory at -0.6% y/y and the core CPI fell to a record low of +0.6% y/y.
Yen - USD/JPY traded sideways in the first half of 2014 but then rallied sharply in the latter half of 2014 as the dollar index rallied against most other currencies in the world. USD/JPY closed up +13.7% in 2014 and posted a 7-1/2 year high of 121.84 yen/dollar in December 2014. The yen was weak against the dollar in 2014 as the Bank of Japan battled a mid-year recession and expanded its already-massive quantitative easing program. The Japanese economy experienced a recession in mid-2014 (Q2 GDP -7.3%, Q3 GDP -1.6%) due to the government's hike in the sales tax to 8% from 5% in April 2014. While Japan was experiencing a recession and while the Bank of Japan was expanding its QE program, the U.S. economy was gaining momentum and the Federal Reserve was ending its QE program. The outlook for Japan remains grim given weak economic growth combined with a massive government debt level.
Articles from the Commodity Research Bureau (CRB) Commodity Yearbook. The single most comprehensive source of commodity and futures market information available, the Yearbook is the book of record of the Commodity Research Bureau, which is, in turn, the organization of record for the commodity industry itself. Its sources - reports from governments, private industries, and trade and industrial associations - are authoritative, and its historical scope is second to none. Additional information can be found at www.crbyearbook.com.