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Exchange-Rate Volatility

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Each day, in spot, forward, and swap transactions throughout the world, more than $1.3 trillion in foreign currencies changes hands. The volume seems large relative to the world’s trade flows, suggesting that exchange-rate movements do more than just allocate goods and services around the globe. Many of these trades involve speculation, in which parties with different expectations about market conditions essentially bet on the reliability of their knowledge. The process promotes a transfer of information. High market volatility indicates uncertainty and trading on disparate information sets. The past two years, for example, have witnessed a sharp increase in day-to-day yen/dollar volatility, even though overall exchange-rate trends do not seem exaggerated. This volatility is associated with uncertainty about Japan’s economic prospects.

Suggested citation: "Exchange-Rate Volatility," Federal Reserve Bank of Cleveland, Economic Trends, no. 99-05, pp. 18, 05.01.1999.

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