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Exchange rates and currency markets
· Concept
Fact, law or dataA rule, statute, definition or measured number.
The price of one currency in another, set mostly by round-the-clock trading among banks, funds and companies.
See it on the Money & Finance map →How it works
Many quotes read as units per dollar: 1,400 won per dollar means $1 buys ₩1,400. Most major currencies float, moving with interest-rate gaps (capital chases higher yields), inflation, trade flows and fear. Some are pegged: Hong Kong's dollar has been held near 7.8 per US dollar since 1983. Currency trading averaged about $9.6 trillion a day in April 2025, the world's biggest market, and the dollar was on one side of about 89% of trades (BIS).
Why it matters
Currency moves change import prices, exporters' profits and foreign returns: a US investor in Korean stocks gains or loses on the won too. Foreign stock funds come currency-hedged or unhedged.
Facts, rules and data
The Bank for International Settlements surveys trading every three years; the Fed's H.10 release and central banks publish daily rates.
Debates and risks
Exchange rates are notoriously hard to forecast: Meese and Rogoff (1983) found models did no better than a random walk, and that largely still holds.
Inside this (5)
Connections (7)
▸The Japanese yen: safe haven and cheap funding currency funds global carry trades in Exchange rates and currency marketsFact, law or data
The connection
In a carry trade, an investor borrows yen at near-zero rates, converts them, and buys higher-yielding assets such as US Treasuries or Mexican pesos. It pays while the yen stays weak, and the selling keeps it weak. When the yen jumps, borrowers rush to repay, selling foreign assets and buying yen, pushing it higher still and jolting markets worldwide.
When and why
August 5, 2024: after a BOJ rate hike and weak US jobs data, the yen surged and Japan's Nikkei fell 12.4%, its worst day since 1987.
How we know
BIS analysis of the August 2024 episode, futures-positioning data from the CFTC, and Japan's retail currency-trading statistics.
Debates and risks
How much of the carry trade was actually unwound in 2024, and whether further BOJ hikes could trigger a repeat, is debated.
▸China's yuan (renminbi) is managed, not freely floating, in Exchange rates and currency marketsFact, law or data
The connection
Each morning the People's Bank of China sets a 'fixing' rate against the dollar, and the onshore yuan may trade only 2% either side. With capital controls and state banks buying or selling dollars, Beijing can steer the currency. An offshore version traded in Hong Kong moves more freely and often signals market pressure.
When and why
Pegged at about 8.28 per dollar from the mid-1990s to 2005; managed float since July 2005; the surprise August 2015 devaluation of about 2% shook world markets.
How we know
PBOC daily fixings, IMF assessments, and US Treasury currency reports, which labeled China a manipulator from August 2019 to January 2020.
Debates and risks
Whether the yuan is under- or overvalued today is debated, and state banks' currency trading is opaque.
▸The Korean won has floated since 1997 in Exchange rates and currency marketsFact, law or data
The connection
Before 1997, Korea kept the won within a narrow daily band around a 'market average rate'. When the Asian crisis hit, the Bank of Korea burned reserves defending it, then abolished the band on December 16, 1997. Since then exporters, foreign investors and Korean savers set the rate, with authorities smoothing sharp swings. Reserves near $400 billion provide insurance.
When and why
December 1997, amid the IMF rescue; the won, about 900 per dollar in mid-1997, briefly neared 2,000 in late December.
How we know
Bank of Korea records, IMF program documents and daily exchange-rate data.
Debates and risks
The US Treasury has repeatedly put Korea on its currency 'monitoring list', and how often Seoul intervenes remains a point of US–Korea discussion.
▸Trade deficits and the current account both shape and respond to Exchange rates and currency marketsMainstream view
The connection
The link runs both ways. A country importing more than it exports pays foreigners in its currency, which tends to weaken it; a weaker currency then makes exports cheaper and imports dearer, narrowing the gap. But foreigners also reinvest their dollars in US Treasuries and stocks, and those inflows can keep the dollar strong, which itself widens the deficit.
When and why
The US has run current-account deficits almost every year since the early 1980s; in the 1985 Plaza Accord, major economies agreed to push the dollar down.
How solid is the link?
Bureau of Economic Analysis trade and current-account data, the Fed's trade-weighted dollar index, and records of the Plaza Accord.
Debates and risks
Whether deficits drive the dollar or foreign saving drives deficits, Ben Bernanke's 2005 'saving glut' argument, is still debated, as are 2025 ideas for deliberately weakening the dollar.
▸Cross-border payments: moving money between countries must convert currencies at Exchange rates and currency marketsFact, law or data
The connection
Unless both sides use the same currency, someone converts. Banks quote a rate with a spread over the market rate: often around 0.1% for big firms, but 2–4% on small payments. Example: sending $10,000 to Korea at a 2% markup costs about $200 on top of wire fees.
When and why
The currency market trades about $9.6 trillion a day (BIS, April 2025), much of it tied to payments and hedging.
How we know
The BIS Triennial Survey, and rates that banks and transfer firms must disclose to consumers under the CFPB's 2013 Remittance Rule.
Debates and risks
Whether hidden exchange markups should be disclosed on business payments too, as they are for consumers, is debated.
▸Global money flows: how capital moves between countries push and pull Exchange rates and currency marketsFact, law or data
The connection
To buy US stocks or Treasuries, a foreign investor must first buy dollars, which pushes the dollar up; selling US assets and bringing money home pushes it down. When the Fed hiked in 2022, inflows lifted the dollar to a 20-year high; in 2025, as foreigners hedged or trimmed US holdings, the dollar fell about 9%.
When and why
In the currency market, about $9.6 trillion a day (BIS, April 2025), centered in London, New York, Singapore, Hong Kong and Tokyo.
How we know
BIS triennial surveys, Treasury TIC flow data and academic studies linking portfolio flows to currency moves.
Debates and risks
Short-term currency moves remain hard to forecast; since Meese and Rogoff (1983), models often fail to beat a simple random-walk guess.
▸BIS FX survey: about $9.6 trillion traded a day (April 2025) measures trading in Exchange rates and currency marketsFact, law or data
The connection
The survey measures how currencies actually trade: spot, forwards, FX swaps, currency swaps and options, by currency pair, location and type of counterparty. That gives economists the hard data behind studies of how exchange rates are set and which currencies dominate.
When and why
Basel, Switzerland, every three years since 1989, with central banks worldwide.
How we know
BIS publications and its public data portal.
Debates and risks
How much trading happens outside the reporting dealers, for example among non-banks.