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Take the Quiz: Do You Recall What Moved Foreign Currency Exchange Rates in 2018?

By Frances Coppola

Businesses faced a challenging foreign currency exchange rate environment in 2018, as the rising U.S. dollar created turbulence around the globe. Already, 2019 seems to be seeing slowing global growth and a more volatile dollar exchange rate, challenging businesses to hone their FX risk-management skills. These 12 questions let finance professionals test their knowledge of exchange rate and monetary policy facts and trends that contributed to business finance uncertainty in the past 12 months.

1) How many times did the Federal Reserve raise interest rates in 2018?

 

a) Two
b) Three
c) Four
d) Five

 

Answer: c) Four1

 

2) The U.S. Treasury yield curve partially inverted in December 2018. What do many economists believe an inverted U.S. Treasury yield curve predicts?

 

a) Recession
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

 

3) Why might the Fed’s interest rate rises cause the dollar’s exchange rate to rise?

 

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.

 

4) Why might some countries raise interest rates in response to a rising 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.

 

5) In economics, a “sudden stop” occurs when banks and credit markets refuse to finance a country’s private and public sector debts. This causes the country’s currency exchange rate to collapse and can result in debt default or a bailout from the International Monetary Fund (IMF). Which two countries suffered “sudden stops” in 2018?

 

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.”

 

6) The Chinese yuan (CNY) doesn’t have a freely floating exchange rate. How is its daily exchange rate usually determined?

 

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.

 

7)Fossil fuels are currently priced in U.S. dollars, although some predict that this could change. Of which fossil fuel is the U.S. the world’s largest producer?

 

a) Coal
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.”

 

8) In which year did the Organization of Petroleum Exporting Countries (OPEC) agree to invoice oil sales in U.S. dollars, thus creating the “petrodollar” and helping to stabilize the U.S. dollar exchange rate?

 

a) 1971
b) 1973
c) 1974
d) 1975

 

Answer: d), 1975; see “The Evolution of U.S. Energy Dominance and its Potential Effects on Exchange Rates.”

 

9) Why might U.S. energy dominance increase U.S. dollar exchange rate volatility?

 

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.

 

10) In the 1980s, how was forex trading done?

 

a) Face to face on “open outcry” trading floors
b) By telephone
c) Through automated brokerage systems
d) Online

 

Answer: b). Although Reuters introduced the first automated information system in 1987, automated brokerage didn’t take off until the 1990s.

 

11) What is a “dark pool”?

 

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.

 

12) How can small businesses participate in the forex market?

 

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

Takeaway:

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.

Frances Coppola - The Author

The Author

Frances Coppola

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.

Sources

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

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