>FLASH MARKETS (ECONOMIC RESEARCH)

Continuously excessive exchange rate fluctuations

In this Flash, we will look at the currencies of major OECD countries (dollar, euro, yen, pound sterling, Swiss franc, Australian dollar) and emerging currencies taken as a whole. At different periods, new mechanisms appear that lead to excessive fluctuations in exchange rates, for different reasons:

• before the crisis (2005-2006, first half of 2007), carry trades financed with low interest-rate currencies (yen, Swiss franc) and invested in higher-interest rate currencies (pound sterling, Australian dollar, emerging currencies, euro);

• in a first phase of the crisis (second half of 2007, first half of 2008), firstly a flight from the dollar as the crisis broke out in the United States, and a switch into emerging currencies (due to the decoupling theory) and into the euro; appreciation of the yen and the Swiss franc, depreciation of the pound sterling and the Australian dollar due to the end of carry trading;

• in a second phase of the crisis (second half of 2008, first quarter of 2009), safe haven role of the dollar, significant aversion for emerging risk, fall in commodity prices: the dollar appreciated; emerging currencies and the Australian dollar depreciated; the pound remained weak and the yen and the Swiss franc strong;

• since April 2009, rise in confidence again and prospect of an improvement in the economy; renewed investment in the currencies of countries where the markets believe growth will return faster: emerging countries, Australia, United Kingdom.

The "stories" told in the markets to justify the currency fluctuations are sometimes far-fetched: there was no reason to doubt that growth would return in most emerging countries, the United Kingdom remains in a tricky situation. However, we can see the huge exchange-rate fluctuations fuelled by the masses of capital shifted around, according to the markets perception. These fluctuations are unacceptable for the countries’ real economies, and are threatening global economic and trade integration.

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