By Frances Coppola
Answer: c) Four1
b) Financial crisis
c) Federal Reserve interest rate cut
d) Higher inflation
Answer: a). An inverted yield curve has preceded every U.S. recession since World War II.2
a) Interest rate rises signal that the U.S. economy is getting stronger
b) Interest rate rises signal that the Fed is well in control of inflation
c) Rising interest rates attract inflows of dollars to the U.S., making them scarcer internationally and thus driving up their price
d) It is simply the dollar exchange rate returning to historical levels as interest rates return to normal
Answer: c). Interest rate rises make the U.S. a more attractive investment destination for investors looking for returns. While interest rates have been unusually low, yield-hunters have moved funds to riskier assets such as developing country debt. As U.S. interest rates rise, investors are moving back into U.S. dollar assets. This increases demand for U.S. dollars and drives up the dollar exchange rate.
a) To prevent their currency exchange rates falling
b) To ward off sudden destabilizing outflows of capital
c) To control inflation due to rising import prices
d) All of the above
Answer: d), all of the above. Countries with fixed or managed dollar exchange rates might raise interest rates to prevent their currency breaking its dollar peg; countries with large trade deficits might raise interest rates to prevent outflows of U.S. dollars triggering FX crisis; countries that import essentials such as oil may raise interest rates to prevent inflation rising.
a) Argentina and Brazil
b) Argentina and Turkey
c) Brazil and Turkey
d) South Africa and Indonesia
Answer: b), Argentina and Turkey. Although the currency exchange rates of Brazil, South Africa and Indonesia all fell significantly in 2018 due to the strong dollar, they did not suffer the economically damaging “sudden stop.”
a) It is pegged to the U.S. dollar
b) By reference to the “offshore” yuan’s (CNH) market price in USD
c) By reference to the CNH market price against a basket of 13 currencies
d) The People’s Bank of China (PBOC) sets it according to political priorities
Answer: c). The PBOC usually sets the mid-point of the CNY to the weighted average exchange rate of the CNH against a basket of 13 currencies including the USD.
b) Crude oil
c) Natural gas
d) Petroleum products
Answer: c), natural gas; see “What the U.S. Becoming a Net Energy Exporter Could Mean for Exchange Rates.”
Answer: d), 1975; see “The Evolution of U.S. Energy Dominance and its Potential Effects on Exchange Rates.”
a) Some energy exporters might invoice in currencies other than the dollar, reducing international demand for the dollar
b) The end of “petrodollar recycling” by OPEC countries could reduce international demand for both the dollar and U.S. government debt
c) Falling U.S. oil imports could mean less dollar liquidity on international markets
d) All of the above
Answer: d). Moves away from pricing oil in dollars, the end of petrodollar recycling, and tighter dollar liquidity due to falling U.S. oil imports, could all make the U.S. dollar exchange rate more volatile.
a) Face to face on “open outcry” trading floors
b) By telephone
c) Through automated brokerage systems
Answer: b). Although Reuters introduced the first automated information system in 1987, automated brokerage didn’t take off until the 1990s.
a) A trading platform that enables financial institutions to trade without disclosing market-moving information
b) A trading platform located in an offshore tax haven
c) An offshore investment fund
d) A high-frequency trading platform
Answer: a). Dark pools enable financial institutions to trade with each other privately without disclosing information that could move prices in the market ahead of the trade settlement.
a) Through banks
b) Through brokers
c) Through online trading platforms
d) All of the above
Answer: d) all of the above. Traditionally, small businesses had to trade forex through banks or dealers, because they typically lacked sufficient credit to access forex markets. But since the early 2000s, retail aggregator trading platforms have enabled small businesses to trade forex directly themselves.
The challenging foreign currency exchange rate environment of 2018 continues in 2019, as economic and political uncertainty makes exchange-rate movements even more unpredictable than they have been before. Finance professionals in small and midsize enterprises will have their knowledge and insights put to the test to as they attempt to hedge their foreign currency exchange risks.
With 17 years’ experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.
1. “Open Market Operations,” Federal Reserve Board https://www.federalreserve.gov/monetarypolicy/openmarket.htm
2. “Why We Should Worry About The U.S. Yield Curve Inverting,” Forbes https://www.forbes.com/sites/francescoppola/2018/12/31/why-we-should-worry-about-the-u-s-treasury-yield-curve-inverting/#45d498b56824