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Economy in Brief

Fears of Higher Rates Cause Turmoil in Foreign Exchange Markets
by Louise Curley May 11, 2004

Earlier this year the weakness in the dollar that had characterized the foreign exchange markets during most of last year reversed itself as growth in the US economy exceeded expectations.

More recently, the probability of higher interest rates resulting from the strength of the economy has led to the unwinding of speculative positions that had been undertaken as investors borrowed at low rates in the US and invested in higher yielding assets abroad.

It is probable that it is this unwinding that is responsible for the recent turmoil in the foreign exchange markets. From May 5th to May 10th, the yen fell 4.4%, compared with a decline of 5.5% over the entire period from the end of 2003 to May 10th. Comparable figures for the Australian dollar were 5.0% and 7.5%. Even the Korean won, which had remained relatively unchanged against the dollar in the December to May period, fell by 2.2% in the May 5-10 period. Declines in the euro and the Canadian dollar were less precipitous, but still notable.

% Chg
Currency/US$ May 10, 04 May 5,  04 Dec 29, 03 Aug 29, 03 May 5-May 10 Dec to May Aug to Dec
Euro 0.8435 0.8216 0.7950 0.9099 -2.6 -5.7 14.5
Yen 113.662 108.684 107.365 116.863 -4.4 -5.5 8.8
Canadian dollar 1.3908 1.3746 1.2963 1.3854 -1.2 -6.8 6.9
Australian dollar 1.4364 1.3646 1.3282 1.5451 -5.0 -7.5 10.3
South Korea won 1190.05 1164.01 1192.46 1174.54 -2.2 0.2 -1.5
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