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Currency speculation and exchange rates: Lessons from the crisis

UNCTAD Public Symposium 2010 10 | “Responding to Global Crises: New Development Paths”

In recent years, some UNCTAD publications highlighted currency speculation as a cause of exchange rate distortion and the build-up of current account imbalances in several countries. Recently, the impact of the crisis on exchange rate trajectories brought new and stronger evidence of this link, which tends to confirm the institution’s position with regard to the role of currency speculation. This short paper examines this new evidence and proposes some policy options to mitigate the problem. In this context, we seek to answer the question why different countries have a similar exchange rate trend, and why countries with higher interest rate have experienced greater exchange rate depreciation during the crisis. The first section of the paper examines the relationship between the variations of exchange rates and those of interest rates. The following section then argues that a financial operation called “carry trade” constitute a link between these two variables. The last section indicates the way forward by presenting ideas for policy measures, in particular a domestic financial tax on financial flows and a restriction of carry trade operations.

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