Exchange Rates During Financial Crises

Abstract

Exchange rate movements during the global financial crisis of 2007–09 were unusual. Unlike in two previous episodes – the Asian crisis of 1997–98 and the crisis following the Russian debt default in 1998 – in 2008 many countries that were not at the centre of the crisis saw their currencies depreciate sharply. Such crisis-related movements reversed strongly for a number of countries. Two factors are likely to have contributed to these developments. First, during the latest crisis, safe haven effects went against the typical pattern of crisis-related flows. Second, interest rate differentials explain more of the crisis-related exchange rate movements in 2008–09 than in the past. This probably reflects structural changes in the determinants of exchange rate dynamics such as the increased role of carry trade activity.

JEL Classification: F3, G01