BIS 75th Annual Report
V. Foreign exchange markets

27 June 2005

The continued broad depreciation of the US dollar and its subsequent partial reversal were the salient features of foreign exchange markets. In 2004 the dollar again depreciated against the euro, the yen and a number of other floating currencies. A new development last year was that the dollar also lost ground against several Asian emerging market currencies. Since January 2005, however, the currency's downward trend has partly reversed. Three main factors appeared to underpin exchange rate movements: market participants' focus on the widening US current account deficit and on rumours of changes in the currency composition of Asian central banks' portfolios; shifting expectations for relative output growth and interest rate changes; and official foreign exchange reserve accumulation in Asia. A special section considers whether the pattern of current account balances or the pattern of currency shares in global portfolios pose problems for the international monetary system.