1

Report to Congress on International Economic and Exchange Rate 

Policies

For the period January 1, 2002 through June 30, 2002

THIS REPORT IS REQUIRED UNDER SECTION 3005 OF THE OMNIBUS TRADE AND 

COMPETITIVENESS ACT OF 1988 (THE “ACT”). THIS REPORT REVIEWS DEVELOPMENTS 

IN U.S. INTERNATIONAL ECONOMIC POLICY, INCLUDING EXCHANGE RATE POLICY.

Major Findings:

• Countries around the world continue to use a variety of exchange rate policies, ranging from flexible 

rates with no intervention to currency unions and full dollarization.

• There was no reversal of the trend toward greater flexibility observed since the mid 1990s. Treasury 

continues to monitor the exchange rate practices of major U.S. trading partners and to encourage policies that 

promote economic growth and economic stability. 

• No major trading partners of the United States manipulated exchange rates under the terms of Section 

3004 of the Act during the period January 1, 2002 to June 30, 20021. 

 

1

“The period” means January 1, 2002 through June 30, 2002 in this report unless otherwise indicated.

The United States:

Current Account

The U.S. current account deficit rose in the first and 

second quarters of 2002, reaching 4.4% and 5.0% of 

GDP in the respective quarters. The current account 

deficit had fallen to $393 billion, or 3.9% of GDP, in 

2001 from $410 billion, or 4.2% of GDP, in 2000. 

Imports, particularly of capital goods, increased

strongly. Export growth was sluggish as the recovery 

in foreign markets lagged that of the United States.

Financial Flows

Net financial flows into the United States remained 

strong through the period, although the composition 

of the flows shifted. A decline in net foreign

purchases of equities was offset by increased

purchases of private and public sector bonds. The 

inflows financed the U.S. current account deficit and 

reflected international investors’ continued strong 

interest in investment opportunities in U.S. markets.

International Investment Position and Earnings

The negative net investment position of the United 

States at the end of 2001 widened to $2.3 trillion, 

when direct investment is valued on a market value 

basis, from a revised $1.6 trillion at the end of 2000. 

The U.S. nevertheless earned a net $21 billion on that 

position during 2001 as net receipts of $103 billion 

from direct investment offset net payments on

portfolio investment. 

2001 2001 2002

Q1 Q2 Q3 Q4 Q1 Q2

Balance on Currenct Account

 Billions of $ -393.4 -107.7 -99.2 -91.3 -95.1 -112.5 -130.0

 Per Cent GDP -3.9 -4.3 -4.0 -3.6 -3.8 -4.4 -5.0

Select Financial Flows

 (+=capital inflow)

 Net Bank Flows -48.3 -97.1 44.1 23.2 -18.6 -9.3 -13.4

 Net Direct Investment Flows 3.0 20.1 16.0 -27.5 -5.6 -13.1 -28.4

 Net Securities Sales 342.7 101.9 37.3 77.0 126.6 73.3 117.8

 Net Liabilities to Unaffiliated Foreigners 

 by Non Banking Concerns 68.0 59.9 4.4 -34.6 38.4 32.4 -1.0

Memo: Statistical discrepancy 10.7 20.8 -2.5 48.3 -55.8 24.7 49.4

Trade in Goods

Balance -427.2 -113.0 -107.7 -105.8 -100.7 -106.4 -122.6

Total Exports 718.8 193.3 184.8 173.3 167.4 164.6 172.7

 of which:

 Agricultural Products 54.9 13.6 13.6 13.6 14.0 13.8 13.5

 Capital Goods Ex Autos 321.7 90.7 82.7 76.2 72.2 71.1 73.6

 Automotive Products 75.4 18.3 19.3 19.3 18.6 18.5 20.1

 Industrial Supplies * 160.2 42.8 41.5 38.3 37.5 36.8 39.9

Total Imports 1145.9 306.3 292.6 279.0 268.0 271.1 295.3

 of which

 Petroleum and Products 103.6 29.2 28.5 25.6 20.2 19.2 27.2

 Capital Goods ex Autos 298.0 84.6 75.4 69.9 68.1 69.3 72.3

 Automotive Products 189.8 47.1 47.9 47.9 46.9 47.6 51.8

Advanced Technology (NSA)

Balance 4.4 4.6 3.5 -1.2 -2.4 -2.0 -2.1

Exports 199.6 57.0 51.5 45.4 45.7 43.6 45.6

Imports 195.2 52.4 48.0 46.7 48.1 45.6 47.6

Source: BEA

* Including Petroleum & Products

U.S. Balance of Payments and Trade

($ billions, SA, unless otherwise indicated)
2

The Dollar in Foreign Exchange Markets

The dollar depreciated modestly, on a trade-weighted 

basis, over the period. The Federal Reserve Board’s 

broad nominal dollar index indicated that the dollar 

depreciated by 2.7%, on a trade-weighted basis, over 

the six-month period, with most of the decline

occurring in May and June.

A closer examination reveals a dichotomy in the

dollar’s performance against the component currency 

groupings in the broad index: the world’s major 

currencies2 and the currencies of the other important 

trading partners3 (OITP) of the United States. During 

the six-month period the dollar depreciated 7.4% 

against the Federal Reserve Board’s trade-weighted 

index of the world’s seven major currencies. But 

over the same period, the dollar actually rose 3.2% 

against the Federal Reserve Broad’s OITP tradeweighted index of the currencies of the United States’ 

19 important emerging market trading partners. 

The appreciation of the dollar against the OITP 

currencies was largely due to currency depreciation 

in Latin America over the first half of 2002. The 

22.5% depreciation of the Brazilian real, which

carries a 4% weight in the OITP index, and the 9.6% 

depreciation of the Mexican peso, which carries a

22.9% weight in the index, more than offset

significant appreciation of the currencies of several of 

the United States’ emerging Asia trading partners. 

During the period, G-7 Finance Ministers and Central 

Bank Governors referred to exchange rates among

the major currencies in two communiqués (February 

9 and April 20, 2002) each time saying: “We will 

 

2

Defined by the Federal Reserve Board as currencies used broadly 

outside their country of issue. The major currencies account for 

54.6% of the weight in Federal Reserve Board’s Broad Index.

3

The OITP are the important trading partners of the United States, 

whose currencies are not used broadly outside their country of

issue. The OITP currencies account for 45.4% of the weight in the 

Fed’s Broad Index.

continue to monitor exchange markets closely and 

cooperate as appropriate.”

The United States did not intervene in foreign

exchange markets during the period.

Major Industrial Economies

Euro Zone Countries

The Euro Zone current account surplus narrowed to 

0.2% of GDP sa during the period from 0.4% of GDP 

in the second half of 2001. Dollar-denominated Euro 

Zone exports rose 3% in the period from the second 

half of 2001, while Euro Zone imports increased

0.2%. Increasing income and transfer payments

offset the gain in the merchandise trade balance. 

The euro appreciated 10.7% against the dollar, while 

the index of the euro’s real effective exchange rate 

appreciated 4.6%, over the period.

Japan

The yen strengthened 10.3% against the dollar in the 

period, rising to 119.5 ¥/$ at the end of June 2002 

from 131.8 ¥/$ at the end of December 2001. In real 

trade-weighted terms, the yen depreciated 1.8%. 

Japan’s current account surplus rebounded in the

period to $59 billion (3.1%/GDP) from $47 billion 

(2.3%/GDP) in the second half of 2001, reflecting an 

expanding merchandise trade and services surplus. 

The merchandise trade surplus reached $46.7 billion 

reflecting export growth of 2.4% and a 4.7% decline 

in imports. The U.S. bilateral trade deficit with Japan 

in the period narrowed slightly to $33.1 billion from 

$34.6 billion in the second half of 2001. 

During the first half of 2002, Japan intervened eight 

times in the foreign exchange market (between late 

May and late June), selling $32.7 billion equivalent 

of yen. These interventions did not appear to have a 

lasting effect on the yen exchange rate, which

continued to appreciate, from 124 ¥/$ at the time of 

the first intervention to 119.5 ¥/$ at the end of the 

intervention period. 

Canada

In the period, the current account surplus fell to 1.8% 

of GDP from 2.8% of GDP in all of 2001. The

current account balance has been below 2% for four 

consecutive quarters. 

Exchange Rates in Dollars

(December 2001 = 100)

70

80

90

100

110

120

130

140

Jun.99Sep.99Dec.99Mar.0Jun.00Sep.00Dec.00Mar.0Jun.01Sep.01Dec.01Mar.0Jun.02Sep.02

Canada China Euro Zone Japan

Korea Malaysia Mexico Taiwan
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The Canadian dollar rose 4.8% against the U.S. dollar 

during the period while the JP Morgan Broad Real 

Trade-Weighted Index of the Canadian dollar rose

2.7%. The Bank of Canada has identified

movements in real non-energy commo dity prices as a 

significant factor in explaining movements in the

U.S.$/C$ exchange rate, and a price index tracking 

these commodities rose 3.3% during the period. The 

Canadian dollar floats freely. A 1998 study by the 

Bank of Canada of its foreign exchange intervention 

concluded that its prior policy of regular intervention 

had very limited impact. Canada has not intervened 

in foreign exchange markets since 1998, except to 

make a small contribution to the brief G7

intervention in support of the euro in September

2000. 

Latin America

Access to international capital markets suffered from 

a decline in investor confidence: net bond issuance in 

the first half of the year was just $10 billion,

compared to $33 billion in the same period in 2001. 

While the overall EMBI+ sovereign bond index

started and ended the period at 799 bps over

comparable U.S. Treasuries, it ranged from a midApril low of 585 to a high of 843 in late June. 

Brazil’s sub-index widened nearly 700 bps at its

greatest and Mexico’s rose as much as 321 bps after 

hitting a low of 230 bps in April. Pressure also 

increased on countries with floating exchange rates, 

while those with fixed exchange rate regimes

experienced a significant depletion of international 

reserves. In June, Uruguay responded to these

pressures by floating its currency.

Argentina

Significant economic, financial, and political turmoil 

erupted in Argentina at the end of 2001, culminating 

in a default on external obligations and an end to 

foreign exchange convertibility (pegging the peso to 

the dollar at 1:1) in January 2002. Following the

decision to float, the peso depreciated from an initial 

level of 1.4 pesos per dollar to a low of 3.86 pesos 

per dollar in late June 2002. From July through midSeptember, the peso was largely stable at about 3.6 

pesos per dollar due in part to additional foreign 

exchange restrictions and seasonal export receipts. 

The Government imposed comprehensive deposit

controls in early December 2001 that remain in place 

as of October 2002.

Argentina had a trade surplus of $8.2 billion in the 

first half of 2002, largely due to import compression, 

compared to a surplus of $6.3 billion for all of 2001. 

The current account balance registered a surplus of 

$1.5 billion in the first quarter of 2002, comp ared to a 

deficit of $3.1 billion in the first quarter of 2001. 

Foreign exchange reserves fell from $14.9 billion at 

end-December 2001 to $9.6 billion at end-June 2002.

Despite the economic crisis, the Merval stock index 

rose by 16% between the beginning of the year and 

end-August as investors looked to equities as a store 

of value. EMBI+ spreads widened by 2,000 bps endDecember to end-August, to 6,435. Talks between 

Argentina and the IMF to reach agreement on an IMF 

program continued throughout the period.

Brazil 

Although financial market sentiment continued to be 

favorable through the first quarter of 2002, investor 

confidence in Brazil began to deteriorate in the

second quarter in the face of election uncertainty. In 

the first semester of 2002, EM BI spreads widened 

696 bps and the currency depreciated 20%.

The substantial nominal exchange rate depreciation 

in the period, as well as the carryover effects of high 

inflation in late 2001, continued to apply upward 

pressure on prices. Consumer price inflation yearover-year was 7.7% in June 2002, the same level as 

in December 2001, despite the declining inflation 

targets of the Central Bank. The monetary authorities 

increased reserve requirements to control the growth 

in liquidity, and intermediation spreads widened

restraining credit growth. However, the Central Bank 

did not increase sales of dollar-linked debt in net 

terms and refrained from substantial intervention in 

the spot foreign exchange market.

Higher trade surpluses due to the weaker real helped 

reduce Brazil’s current account deficit to $8.3 billion, 

compared with $13.3 billion for the same period in 

2001. More than fully financing the current account 

deficit, foreign direct investment (FDI) was $9.6

billion for the first six months of 2002 compared with 

$9.9 billion for the same period in 2001.

Net international reserves (net of IMF funds as

reported by the Central Bank) decreased by $500 

million during the period to $27.3 billion. Short-term 

external debt by residual maturity was 230% of net 

reserves. 

Mexico

Although Mexican peso and sovereign bond spreads 

were affected in the first half of the year by emerging 
4

market turbulence and technical factors, economic 

fundamentals pointed to a modest recovery as real 

growth rose to 4.7% saar in the second quarter. The 

depreciated peso did not lead to significantly

increased inflation, with the June y/y change in the 

CPI holding at 4.9%, compared with 4.4% in

December 2001. The Bank of Mexico eased its

monetary policy stance in April after a February 

tightening in response to unanticipated increases in 

energy and transportation costs.

In the first half of the year, foreign direct investment 

is estimated to have covered roughly two-thirds of 

the current account deficit, which narrowed to an 

estimated 2.5% of GDP. In the same period, net 

international reserves grew by $800 million, reaching 

$45.6 billion by end-June. This was equivalent to 

three-quarters of the gross external financing

requirement, estimated at $61 billion, for 2002 and 

covered 125% of short-term debt. 

The Mexican peso, which the government allows to 

float freely, depreciated 8.6% against the dollar over 

the period. Labor productivity rebounded during the 

first half of 2002 while unit labor costs moderated, 

consequently improving competitiveness. The real 

effective exchange rate (based on consumer prices) 

appreciated just 2% in the year to May. 

Central and Eastern Europe

Countries in this region experienced very different 

exchange rate pressures. A recovery in oil prices 

early in 2002 again placed upward pressure on 

Russia’s exchange rate during the period. While the 

ruble depreciated from 30.14R/$ at the end of 2001 to 

31.4 R/$ at the end of June 2002, the ruble’s real 

effective exchange rate was little changed in the

period from the beginning of the year, compared to a 

7% appreciation in 2001. Intervention in the foreign 

exchange market helped boost reserves $6 billion to 

$42.5 billion at end-June 2002. In Ukraine, the

hryvnia remained stable in both nominal and real 

terms during the period, strengthening slightly from 

5.4/$ to 5.32/$. 

In the key Central European economies, the prospect 

of future EU membership and inflows of capital in 

the form of privatization payments and FDI have 

resulted in a continued, albeit slower, strengthening 

of the currencies in real terms. Both the Polish zloty 

and the Hungarian forint were relatively stable

against the euro in the period, while strengthening 

somewhat against the dollar. In the Czech Republic, 

the main policy preoccupation during the period

remained concern with continued crown appreciation 

in the face of the inflow of privatization receipts and 

EU accession-related funds, but the government did 

not undertake any significant steps to limit the

strength of the crown. The strengthening of these 

three currencies helped to continue to control

inflation in the region, with the average inflation rate 

in Poland falling to under 1.8%, while in the Czech 

Republic inflation was only 1.2% at the end of the 

period. Consumer price inflation in Hungary fell to 

4.9% y/y in June 2002 and is expected to continue to 

decline through the rest of the year. 

Asia

Asian economies showed significant recovery in the 

first half of 2002. Exports increased substantially 

throughout the region, especially information technology exports. Stronger domestic demand boosted 

imports as well, moderating improvements in current 

account balances. 

Improved economic and financial prospects, as well 

as declining U.S. dollar interest rates relative to rates 

on local currency assets, made foreign investment in 

regional economies more attractive. This, in addition 

to the overall improvement in current account

balances, added support to regional currencies. For 

those economies with fixed exchange rates, balance 

of payments surpluses led to an increase in reserves. 

With inflation close to zero in many economies, those 

with floating but managed exchange rates intervened 

to slow the pace of exchange rate appreciation in 

order to reduce the risk of deflation. As a result, 

nominal exchange rates remained stable versus the 

dollar during the first quarter of 2002, while those not 

pegged to the dollar for the most part appreciated 

moderately in the second. Indonesia and Korea,

which appreciated roughly 20% and 10% respectively, were exceptions. On the other hand the real

effective value of Asian currencies typically

depreciated as a globally weakening dollar carried 

currencies with nominal dollar parities or modest

appreciation against the dollar along with it. 

China

China’s exports accelerated to 35% y/y growth, up 

from 5% y/y in the previous half-year. But imports 

also accelerated (to 28% y/y growth from 3% y/y in 

the previous period), so China’s balance of trade in 

goods (FOB-CIF) rose only marginally to 2.5% of 

GDP from 2.4% in the previous half and 1.6% a year 

earlier. The current account surplus is estimated at 
5

roughly 2.0% of GDP, also marginally higher than in 

the previous half year. U.S. data show China’s 

merchandise trade surplus with the U.S. was $43 

billion in the period, compared to $37 billion in the 

same period a year earlier, as inputs from other

emerging Asian countries are increasingly routed

through China for assembly for export principally to 

the U.S. China has a significant deficit with nearly 

all its Asian trading partners, and half its exports 

come from coastal foreign-funded operations.

Reported capital inflows also increased significantly 

during the reporting period as a result of stronger FDI 

inflows, which grew 21% y/y to $35 billion for the 

half-year period. 

China maintains a de facto currency peg to the dollar, 

which it has kept within a tight band since 1995. As 

a result of the higher current account surplus and 

reported capital inflows, gross foreign reserves grew 

$31 billion to $243 billion. Gross reserves were

830% of short-term external debt (residual maturity) 

at end-December 2001. At the time of publication, 

similar data for end-June 2002 are not available. In 

real effective terms, the renminbi depreciated roughly 

6% during this period, as the U.S. dollar weakened 

globally. China continues to maintain wide-ranging 

controls on both capital outflows and inflows. 

Korea

Due to a boom in consumer credit supporting

domestic demand, and a larger services deficit

(despite Korea’s hosting of the World Cup), the

current account surplus as a percentage of GDP 

declined to 1.6%, down from 3.2% in the first half of 

2001. Korea’s merchandise trade surplus with the

U.S. declined slightly to $6.1 billion from $6.4

billion during the same period in 2001. Korea had a 

small capital account surplus of 0.3% of GDP in the 

first half of 2002, as an increase in foreign currency 

borrowings by deposit banks and a reduction in 

foreign currency loans offset significant portfolio 

outflows. In May 2002, the Bank of Korea,

concerned about potentially higher oil prices, a real 

estate boom, and strong domestic demand, raised its 

target policy rate by 25 basis points, which attracted 

further capital inflows. 

Korea maintains a floating exchange rate, intervening 

only to curb what it views as excessive volatility. 

The won appreciated 9.3% against the U.S. dollar (on 

a nominal basis) and appreciated 4.7% (on a real 

effective basis.). Official intervention was modest. 

Gross reserves increased by $9.6 billion (9.4%)

during the reporting period to $112.4 billion (26% of 

GDP) at the end of June, in part as a result of interest 

earnings and valuation adjustments as the dollar

depreciated against other reserve currencies during 

this period. As of June 2002, reserves were

approximately 235% of short-term external liabilities 

(residual maturity basis), a decrease from 263% at 

end-2001. Korea maintains relatively few

restrictions on capital flows.

Malaysia

After falling 10% in 2001, export growth was flat 

over the first half of 2002 compared to the

corresponding period in 2001. Meanwhile,

expansionary fiscal policy and low interest rates

provided a strong boost to domestic demand and

hence imports. As a result, Malaysia’s trade surplus 

contracted by 11.7% over the reporting period

compared to the first half of 2001. The current 

account surplus, at 7.5% of GDP, fell from 8.3% of 

GDP in the first half of 2001. Malaysia’s bilateral 

trade surplus with the United States rose to $6.0 

billion in the period from $2.6 billion in the first half 

of 2001, reflecting increased U.S. demand for

Malaysia’s electronics exports.

Malaysia has maintained a fixed peg to the dollar 

since September 1998, when it also imposed capital 

controls. Controls have since been relaxed, but 

offshore trading of the ringgit remains prohibited and 

foreign portfolio investment by residents continues to 

be restricted. The Malaysian authorities have

steadfastly maintained the peg despite alternating 

periods of downward and upward pressure on the 

ringgit. On a real trade-weighted basis, the ringgit 

depreciated 1.2% during the period, reflecting broadbased weakness of the U.S. dollar. Since the

introduction of the peg, however, the ringgit has

appreciated 16.7% in real trade-weighted terms. At 

the end of the period, reserves stood at $33 billion, 

equal to 275% of short-term external debt (residual 

maturity), up from $30 billion, or 258% of short-term 

external debt, at the end of 2001. 

Taiwan

Taiwan’s current account surplus grew to 9.6% of 

GDP in the period from 5.2% in the first half of 2001. 

However, the increase in Taiwan’s global trade

surplus was driven by the growth of exports to the 

region, especially Hong Kong (China). Taiwan’s 

merchandise trade surplus with the U.S. declined to 

$6.7 billion from $7.5 billion during the same period 

in 2001.

As U.S. dollar interest rates fell relative to rates on 

New Taiwan dollar (NT$) assets, Taiwanese deposi-
6

tors shifted a greater share of their holdings to NT$ 

accounts. This led to a large net financial account 

inflow (6% of GDP) in the period. This, along with 

the large current account surplus, caused the NT$ to 

appreciate 3.7% on a nominal basis against the U.S. 

dollar and 0.4% on a real trade-weighted basis. 

Monetary authorities intervened significantly. 

Official reserves grew by US$26 billion in the period 

to US$148 billion, i.e., roughly 500% of total

external debt. 

Taiwanese authorities were reluctant to allow a sharp 

currency appreciation in the period, given

macroeconomic conditions and policy constraints. 

Due to the openness of Taiwan’s economy, exchange 

rate changes have relatively large impacts on

inflation, inflationary expectations and real output. 

With inflation near zero, Taiwanese officials were 

concerned that a sharp appreciation could lead to an 

undesirable deflationary cycle. M2 was, in fact,

within the Central Bank of China’s 31⁄2% to 81⁄2% 

target range throughout the period. Tensions with 

China and lack of access to IMF resources may have 

also encouraged the accumulation of foreign 

exchange reserves. 

Summary :

This report reveals a wide variety of exchange rate 

policies used by the major trading partners of the

United States. Based on a broad review Treasury 

concluded that no major trading partners of the

United States manipulated exchange rates under the 

terms of Section 3004 of the Act during the period. 4

 

4

Section 3004 of the Omnibus Trade and Competitiveness Act of 

1988 requires the Treasury to analyze annually the exchange rate 

policies of foreign countries, in consultation with the IMF, and to 

consider whether countries manipulate the rate of exchange

between their currency and the dollar for purposes of preventing 

effective balance of payments adjustments or gaining unfair

competitive advantage in international trade. The Secretary of the 

Treasury is required to undertake negotiations with those

manipulating countries that have material global current account 

surpluses and significant bilateral trade surpluses with the United 

States, unless such negotiations would have a serious detrimental 

impact on vital national economic and security interests.