Exchange Rates & Currency Markets
The US dollar index trades near 104 after a 9% real-effective appreciation over two years. The yen has weakened past 158 against the dollar, the yuan is managed within a controlled band, and several emerging markets have spent reserves defending their currencies.
Key insights
Dollar strength persists
The Fed funds rate at 5.25% versus the ECB at 4.00% and BoJ at 0.50% keeps real-yield differentials in the dollar's favor. The dollar's broad index (DXY) has appreciated 9% in real-effective terms since 2024. Safe-haven flows around the Ukraine and Middle East conflicts compound the spread story. Strength is concentrated against the yen (40-year low) and emerging market currencies.
Yen weakness invites intervention
USD/JPY broke above 160 in early 2024 and the MoF intervened with an estimated $62B of dollar sales. Each intervention has produced a 3–5% bounce that fades within weeks. Carry trades funded in yen — borrow at 0.5%, buy USD assets at 5%+ — sustain the structural pressure. A full BoJ normalization remains the only durable path to reversal.
Emerging-market FX under pressure
Argentina (peso), Turkey (lira) and Egypt (pound) have lost 50–80% against the dollar over three years. Brazil, Mexico, India and Indonesia held firmer through higher real rates. China manages USD/CNY within roughly ±2% of a daily fixing; defending 7.30 has cost reserves and tightened capital controls. The IMF flags 14 frontier markets with reserve cover under 3 months of imports.
US Dollar Index (DXY) 2014–2026
Monthly broad trade-weighted dollar index, March 1973 = 100
Key Finding: DXY rose from 80 (2014) to 104 (2026), with the steepest gains during 2022 hiking cycle (peak 114). Each Fed pivot signal has triggered a 4–6% retracement that has since been bought.
Spot rates vs USD — major pairs
Indexed to 100 at Jan 2020
Key Finding: Yen weakened 35% versus USD since 2020; euro flat to slightly weaker; yuan held within a 7% band by PBoC management.
Reserve adequacy — months of import cover
FX reserves divided by monthly goods imports, 2026
Key Finding: China holds the deepest buffer at 14 months of imports; Argentina sits below 2 months. The IMF flags below 3 months as a stress signal.
Methodology & caveats
Nominal vs real exchange rates
Nominal rates are quoted prices. Real effective exchange rates (REER) adjust for inflation differentials across a basket of trading partners — they are the better gauge of competitiveness. A 5% nominal depreciation against a partner that has 5% higher inflation leaves the real rate unchanged.
What moves currencies
Short term: rate-differential expectations dominate, with risk-on/risk-off flows on top. Medium term: current account balances, terms of trade, productivity differentials. Long term: relative monetary stability, institutional credibility, productivity convergence. PPP holds only over very long horizons (decades) and even then with wide bands.
Intervention and reserves
Direct intervention sells reserves to buy domestic currency (or vice versa). Effectiveness depends on signaling, sterilization, and whether intervention aligns with fundamentals. Reserves are typically held in dollar, euro and yen assets; rising gold allocations since 2022 reflect sanctions risk among central banks.