Why was the tension growing in the foreign-exchange market

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Reference no: EM132113791

During the recent global financial crisis on Sep 29, 2010, driven by political rhetoric, anxiety is brewing in global currency markets as nations fight to protect their exporters amid anemic recovery from the global financial crisis. This tension is causing concern about potentially trade wars. Countries, including Japan, Taiwan, South Korea, Thailand, Brazil, Columbia, Peru have already intervened to lower the value of their currencies. Japan, which is the leader of the group, has seen its currency appreciate 14% against the U.S. over the past four months. To stem the yen's rise, Japan has geared up efforts including the recent sale of $20 billion of its currency, which traders characterize it to be one of the biggest-ever intervention in a day. U.S. Congress is weighing in to enact a law that targets China for deliberately keeping its yuan artificially low. Brazil may impose a tax on some short-term fixed income investments, a factor that is believed to have led to the appreciation of the real. Emerging markets with robust economies and relatively high interest rates are attracting capital from the developed world, driving the demand for local currencies. International Monetary Fund (IMF) Managing Director Strauss-Kahn does not believe there is a big risk for currency wars because if history is any guide, the effect of intervention in the foreign-exchange market is short-lived.

1. Why was the tension growing in the foreign-exchange market then?

2. What was the specific intervention measure (direct or indirect; sterilized or non-sterilized) that Japan used in the foreign-exchange market to stop the appreciation of its currency?

3. Do you agree with (IMF) Managing Director Strauss-Kahn’s opinion? Why or why not?

Reference no: EM132113791

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