Econ 340 Lecture 13 Exchange RatesNews Feb 24 – Mar 9 • US & EU contemplate sanctions against Russia due to Ukraine/Crimea -- WSJ: 3/4 | Proquest | NYT: 3/4 | Proquest | FT: 3/7 | CTools – In response to Russian-uniformed soldiers taking over the Crimean peninsula, part of Ukraine, the US and EU warned of sanctions. The US immediately suspended military cooperation and talks with Russia about increasing trade and investment. The EU took no action immediately, but warned of action within days. – Later in the week, the US issued visa bans for Russian officials. The EU suspended talks on trade and visa liberalization, and it agreed to parts of the integration agreement with Ukraine, the rejection of which by then-president Yanukovish had originally prompted confrontation. – Other steps might include sanctions on Russian banks and freezing assets of Russian officials and companies. More serious would be to cut off trade, but that could hurt the EU as much as it hurts Russia. US trade sanctions alone would have little effect, as the US is not a major trading partner of Russia. • China's currency drops in value -- WSJ: 2/25 | Proquest | Economist: 3/1 | Proquest | FT: 2/24 | CTools – China's currency -- the renminbi, or yuan -- fell in value against the US dollar by an unprecedented amount. This is a currency that has been carefully managed by the Chinese central bank and has changed very little, except to rise slowly, over the last decade and more. So this drop, which was understood to be deliberate by the central bank, was a huge surprise. – The movement was very small compared to recent changes in other currencies. But it was significant because international investors had believed that they could not lose holding reminbi. It was viewed as a "one-way bet." One motivation for the change was to undermine this expectation, and thus discourage capital inflows. Another was that, while the renminbi had risen slowly relative to the US dollar, it had risen much more relative to China's exporting rivals, thus reducing its competitiveness. – There are two dollar-renminbi exchange rates, "onshore" and "offshore," made possible by China's strict controls on capital movements. It was the offshore rate that fell the most, reducing its premium above the onshore rate. • Bitcoin exchange, Mt Gox, suffers more than $400 million theft -- WSJ: 3/1 | Proquest | NYT: 2/25 | Proquest | FT: 2/26 | CTools – Owners of the "cryptocurrency" or "virtual currency" Bitcoin, much of which had been traded through and held at a Tokyo based exchange, Mt. Gox, found their holdings unavailable after Mt. Gox suffered a more than $400 million theft and went bankrupt. As the exchange was unregulated, those who lost are not protected. – The theft was apparently made possible by a flaw in the software. "There was some weakness in the system, and the bitcoins have disappeared. I apologize for causing trouble," said Mt. Gox CEO Mark Karpeles. – Bitcoin was created about 5 years ago, by an "anonymous" person or group named Satoshi Nakamoto (recently claimed to have been found by Newsweek), and is not backed by any real commodity nor by any central bank. Econ 340, Deardorff, Lecture 13: Exchange Rates 2News Feb 24 – Mar 9 • US & EU contemplate sanctions against Russia due to Ukraine/Crimea – In response to Russian-uniformed soldiers taking over the Crimean peninsula, part of Ukraine, the US and EU warned of sanctions. The US immediately suspended military cooperation and talks with Russia about increasing trade and investment. The EU took no action immediately, but warned of action within days. – Later in the week, the US issued visa bans for Russian officials. The EU suspended talks on trade and visa liberalization, and it agreed to parts of the integration agreement with Ukraine, the rejection of which by then-president Yanukovich had originally prompted confrontation. – Other steps might include sanctions on Russian banks and freezing assets of Russian officials and companies. More serious would be to cut off trade, but that could hurt the EU as much as it hurts Russia. US trade sanctions alone would have little effect, as the US is not a major trading partner of Russia. Econ 340, Deardorff, Lecture 13: Exchange Rates 3Econ 340, Deardorff, Lecture 13: Exchange Rates 4News Feb 24 – Mar 9 • China's currency drops in value – China's currency -- the renminbi, or yuan -- fell in value against the US dollar by an unprecedented amount. This is a currency that has been carefully managed by the Chinese central bank and has changed very little, except to rise slowly, over the last decade and more. So this drop, which was understood to be deliberate by the central bank, was a huge surprise. – The movement was very small compared to recent changes in other currencies. But it was significant because international investors had believed that they could not lose holding reminbi. It was viewed as a "one-way bet." One motivation for the change was to undermine this expectation, and thus discourage capital inflows. Another was that, while the renminbi had risen slowly relative to the US dollar, it had risen much more relative to China's exporting rivals, thus reducing its competitiveness. – There are two dollar-renminbi exchange rates, "onshore" and "offshore," made possible by China's strict controls on capital movements. It was the offshore rate that fell the most, reducing its premium above the onshore rate. Econ 340, Deardorff, Lecture 13: Exchange Rates 5Econ 340, Deardorff, Lecture 13: Exchange Rates 6Econ 340, Deardorff, Lecture 13: Exchange Rates 7Econ 340, Deardorff, Lecture 13: Exchange Rates 8Econ 340, Deardorff, Lecture 13: Exchange Rates 9News Feb 24 – Mar 9 • Bitcoin exchange, Mt Gox, suffers more than $400 million theft – Owners of the "cryptocurrency" or "virtual currency" Bitcoin, much of which had been traded through and held at a Tokyo based exchange, Mt. Gox, found their holdings unavailable after Mt. Gox suffered a more than $400 million theft and went bankrupt. As the exchange was unregulated, those who lost are not protected. – The theft was apparently made possible by a flaw in the software. "There was some weakness in the system, and the bitcoins have disappeared. I apologize for causing trouble," said Mt. Gox CEO Mark Karpeles. – Bitcoin was created about 5
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