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 Chicago Mercantile Exchange (CME), division of the CME Group.
Dollar - The dollar index strengthened during the first half of 2013 on the relatively strong performance of the U.S. economy, along with improved interest rate differentials relative to Europe and Japan after the Bank of Japan (BOJ) expanded its quantitative easing program in April and the European Central Bank (ECB) cut its refinancing rate to a record low of 0.50% in May. In July, the dollar index rose to a 3-1/2 year high on expectations for the Fed to begin to taper its third quantitative easing program (QE3). The dollar fell back sharply in Q3, however, after wrangling in Washington over a continuing resolution and a debt ceiling hike prompted the Fed to postpone tapering. The dollar index posted a 1-year low in October after a partial shutdown of the U.S. government on October 1-16 fueled worries about a disruption in U.S. economic growth. The dysfunction in Washington also undercut the dollar after Fitch Ratings put the AAA credit rating of the U.S. on negative watch. The dollar index rebounded into year-end and finished the year little changed, up +0.4%, after the Fed finally cut QE3 by $10 billion at its December 2013 FOMC meeting.
Euro - EUR/USD pushed up to a 1-year high in February 2013 as containment of the European sovereign debt crisis dampened speculation the European Central Bank (ECB) would need to provide additional stimulus measures. EUR/USD tumbled into April on concerns about Italy after the inability of Italy's political parties to form a government more than a month after February's elections. The Eurozone economy weakened into Q2 which prompted ECB President Draghi at the April ECB meeting to state that the economic risks in the Eurozone were to the downside. This pushed EUR/USD to the low for the year in April as the dovish comments from Mr. Draghi boosted speculation the ECB would likely cut its refinancing rate by 25 bp within the next several meetings. The ECB did indeed cut its refinancing rate by -25 bp to a record low of 0.50% at the May 2013 policy meeting. EUR/USD rebounded in Q3 as the Eurozone economy improved, which further reduced European debt concerns after yield premiums for Italian and Spanish 10-year bonds over German bunds shrank to 2-year lows. Also, Moody's Investors Service in November upgraded the outlook on Portugal's government bond rating to stable from negative. EUR/USD moved higher into year-end and finished 2013 up +5.8% for the year.
Yen - The yen posted its high for 2013 in January at 115 yen per dollar and then proceeded to sell off on expectations for the Bank of Japan (BOJ) to expand its quantitative easing program. The BOJ did not disappoint as it massively expanded its QE program in April when it said it would start buying 7 trillion yen ($75 billion) of government bonds per month for at least two years or until the inflation rate reaches 2.0% from the level at the time of -0.7%. The BOJ plan involved expanding its balance sheet asset level from the end-2012 level of 158 trillion yen ($1.6 trillion) to 290 trillion yen ($3.0 trillion) by the end of 2014. This aggressive easing by the BOJ punished the yen as it continued to slide the rest of the year. The yen plummeted to a 5-year low of 95 yen per dollar in December and finished the year down -17.7%.
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.