54 terms

Currencies and macro

Appreciation: A rise in a currency's market value against another under a floating regime, the mirror image of depreciation.
Asian financial crisis (1997): The chain of currency collapses that began when Thailand floated the baht in July 1997, spreading through Southeast Asia and Korea and ending several dollar pegs.
Balance of payments: The full accounting of a country's transactions with the rest of the world, split into the current account and the capital and financial accounts, which must offset each other.
Big Mac index: A light-hearted purchasing power comparison that uses the price of one standardised burger in each country to judge whether a currency looks cheap or expensive.
Black Wednesday (1992): The day in September 1992 when the UK abandoned its attempt to hold sterling inside the European Exchange Rate Mechanism, after rate rises and reserve spending failed to stop the selling.
Bretton Woods system: The post-1944 arrangement under which major currencies were fixed against the US dollar and the dollar was convertible into gold at a set price, ending in the early 1970s.
Capital and financial account: The side of the balance of payments recording cross-border investment flows: direct investment, portfolio flows, banking flows and changes in official reserves.
Capital controls: Official restrictions on moving money in or out of a country, ranging from taxes on inflows to outright limits on how much foreign currency residents may buy.
Carry-to-volatility ratio: The annual interest pickup on a carry position divided by the currency pair's annualised volatility, used to judge whether the yield is worth the risk of holding it.
Central bank intervention: Direct buying or selling of a currency by a central bank or finance ministry to influence its exchange rate, usually against a move officials describe as disorderly.
Central bank swap line: A standing agreement between central banks to exchange currencies at a set rate, used to supply foreign currency, usually dollars, to banks in another jurisdiction during a funding squeeze.
Commodity currency: A currency whose economy depends heavily on raw material exports, so that it tends to strengthen when those commodity prices rise and weaken when they fall.
Covered interest arbitrage: Borrowing in one currency, lending in another, and locking the exchange rate back with a forward, so any deviation from interest rate parity becomes riskless profit.
Crawling peg: A peg that is adjusted in small, pre-announced or rule-based steps over time, usually to let a high-inflation currency depreciate gradually instead of in a single shock.
Cross-currency basis: The extra spread paid above or below theoretical parity to borrow one currency against another, a live measure of how scarce a funding currency is.
Cross-currency swap: A long-dated agreement to exchange principal and interest payments in two currencies, used by borrowers to raise money in one market and service it in another.
Currency board: A rigid peg written into law, under which every unit of domestic currency issued is backed by foreign reserves and the issuer gives up discretionary monetary policy entirely.
Currency correlation: The tendency of pairs to move together or in opposition because they share a currency leg or a common driver, which quietly multiplies risk across what look like separate trades.
Currency hedging: Removing or reducing exchange rate exposure on a foreign asset, liability or cash flow, usually with a forward, a swap or an offsetting spot position.
Currency nicknames: Trading-floor names for currencies and pairs, such as cable for GBP/USD or loonie for the Canadian dollar, still used in commentary and chat.
Currency peg: An official commitment to hold a currency at or near a fixed rate against another currency or basket, maintained by buying and selling reserves at the chosen level.
Currency war: A period in which several countries try to weaken their currencies at once to gain export advantage, a policy that cannot work for everyone because exchange rates are relative.
Current account: The part of the balance of payments covering trade in goods and services plus income and transfers, and the headline measure of whether a country earns more from the world than it spends.
Depreciation: A fall in a currency's market value against another, driven by supply and demand rather than by an official decision.
Devaluation: A deliberate official reduction in a pegged currency's fixed rate, moving the defended level to a weaker one, typically after reserves or credibility run short.
Dollar smile: The observation that the dollar tends to rise both when the US economy strongly outperforms and when the world is in crisis, and to weaken in the middle when global growth is broad and calm.
Dollarization: Adopting a foreign currency, usually the US dollar, as the domestic means of payment, either officially by law or unofficially as citizens abandon a failing local unit.
Emerging market currency: The currency of a developing economy, typically offering a high interest rate alongside wider spreads, thinner liquidity, event risk and the possibility of capital controls.
Eurodollar market: The market in US dollar deposits and loans held at banks outside the United States, which sets much of the world's dollar funding cost and has nothing to do with the euro.
Flight to quality: The movement of capital out of risky assets into the safest available ones during stress, which in currencies means bidding up the dollar, yen and franc and selling high-yielders.
Foreign exchange reserves: The foreign currency assets a central bank holds, used to defend a peg, intervene, service external debt and reassure lenders; published monthly and watched closely.
Free floating currency: A currency whose rate is set entirely by market supply and demand, with the central bank targeting inflation or employment rather than any exchange rate level.
Interest rate parity: The rule that forward exchange rates must offset the interest rate gap between two currencies, or riskless arbitrage would be available.
Law of one price: The principle that an identical good should cost the same everywhere once converted into a common currency, because any gap invites arbitrage until it closes.
Managed float: A regime where the exchange rate is broadly set by the market but the authorities intervene when they dislike the pace or level, without publishing a target.
Month-end rebalancing flow: Currency buying or selling driven by fund managers adjusting hedges on foreign assets at month end, typically concentrated into the late London fixing.
Nixon shock: The August 1971 suspension of the dollar's convertibility into gold, which ended the Bretton Woods system and led within two years to the floating rates traded today.
Non-deliverable forward (NDF): A cash-settled forward on a restricted currency: no local currency changes hands, only the difference between the agreed rate and an official fixing, paid in dollars.
Petrocurrency: A currency whose value is closely tied to oil, either because the country exports it in size or because oil revenues dominate its government finances.
Plaza Accord: The 1985 agreement among five major governments to weaken the US dollar through coordinated intervention, and the clearest example of official action successfully moving an exchange rate.
Purchasing power parity (PPP): The idea that exchange rates should eventually settle where the same basket of goods costs the same in both countries, making it a long-run anchor rather than a trading signal.
Real effective exchange rate (REER): A currency's value against a trade-weighted basket of partner currencies, adjusted for relative inflation, published as an index and used to judge over or undervaluation.
Real exchange rate: The nominal exchange rate adjusted for the difference in price levels between two countries, showing how competitive one is against the other in actual purchasing terms.
Real interest rate: The nominal policy or market rate minus inflation, giving the return in actual purchasing power and a better guide to currency flows than the headline rate.
Reserve currency: A currency that central banks hold in quantity, that trade is invoiced in, and that borrowers outside its home country issue debt in; the dollar is the dominant one by a wide margin.
Revaluation: A deliberate official increase in a pegged currency's fixed rate, making the currency stronger against its anchor, usually in response to trade surpluses or inflows.
Safe haven currency: A currency that tends to attract flows during market stress, historically the US dollar, the Japanese yen and the Swiss franc, regardless of what caused the stress.
Sterilised intervention: Currency intervention whose effect on the domestic money supply is deliberately offset by an opposite open market operation, so policy rates are left undisturbed.
Swiss franc unpeg (2015): The removal of the Swiss National Bank's floor under EUR/CHF on 15 January 2015, which moved the pair by double digits in minutes and bankrupted several retail brokers.
Terms of trade: The ratio of a country's export prices to its import prices; when it improves, the same volume of exports buys more imports and the currency usually benefits.
Trade-weighted index: An index measuring a currency against a basket of others, weighted by trade shares, so that a move against one partner does not distort the picture.
Uncovered interest parity: The theory that a high-yielding currency should weaken by enough to cancel its interest advantage; it consistently fails in the data, which is why carry trades exist.
Verbal intervention: Officials talking a currency up or down with pointed language about the exchange rate, without spending any reserves, often as a warning before real intervention.
Yen carry unwind (2024): The rapid reversal of short-yen carry positions in July and August 2024, when a Bank of Japan rate rise met falling US yields and forced leveraged positions to be closed at once.

Back to the full dictionary.