The economics of currency crises has evolved through successive “generations” of models, each reflecting the historical experience and intellectual climate of its time. From the fixed exchange rate collapses of the 1970s to the financial crises of the 1990s and beyond, economists have sought to explain why speculative attacks occur, how they unfold, and what policy choices can prevent or exacerbate them. The three generations of models—spanning from mechanical balance-of-payments inconsistencies to self-fulfilling expectations and financial fragility—together trace a trajectory from deterministic to strategic and behavioural understandings of crises. Yet, in a modern world of complex capital markets and hybrid monetary regimes, each generation’s insights also reveals its limitations.
Read MoreA weaker dollar seems to be the answer to everyone’s prayers at the moment—or more specifically, investors want exposure to the exceptionalism of U.S. capital markets without the currency exposure that comes with it. From the BIS, via FXStreet:
Read MoreMany investors still want to remain invested in US equities (belief in US exceptionalism is alive and well!), but at the same time, they see growing risks for the US dollar, not least due to the US government’s attacks on the Federal Reserve. A significant depreciation of the dollar could reduce the returns on the actual equity investment or even wipe them out entirely. So what is the solution? Hedging against dollar weakness. Ultimately, these hedges are effectively bets on a weaker US currency and, if widely adopted, create selling pressure on the dollar."