Financial Exchange Rates And International Currency Exposures

The goal in this project is to gain a better empirical understanding of the international financial implications of currency movements. To this end, the authors construct a database of international currency exposures for a large panel of countries over 1990-2004. They show that trade-weighted exchange rate indices are insufficient to understand the financial impact of currency movements. They show that the currency measure has high explanatory power for the valuation term in net foreign asset dynamics: exchange rate valuation shocks are sizable, not quickly reversed and may entail substantial wealth redistributions. Further, they demonstrate that many developing countries hold short foreign-currency positions, leaving them open to negative valuation effects when the domestic currency depreciates.