R E P O R T T O C O N G R E S S

FOREIGN EXCHANGE POLICIES

 OF MAJOR TRADING PARTNERS OF

THE UNITED STATES

U.S. DEPARTMENT OF THE TREASURY

OFFICE OF INTERNATIONAL AFFAIRS

October 14, 2016
Contents

EXECUTIVE SUMMARY............................................................................................................. 1

SECTION 1: GLOBAL ECONOMIC AND EXTERNAL DEVELOPMENTS........................................... 8

U.S. DOMESTIC ECONOMIC TRENDS .................................................................................................... 8

U.S. EXTERNAL TRENDS .................................................................................................................. 10

INTERNATIONAL ECONOMIC TRENDS .................................................................................................. 13

SECTION 2: INTENSIFIED EVALUATION OF MAJOR TRADING PARTNERS ................................ 32

KEY CRITERIA................................................................................................................................. 32

SUMMARY OF FINDINGS .................................................................................................................. 34

SECTION 3: ASSESSMENT FACTORS FOR ENHANCED ANALYSIS.............................................. 36

GLOSSARY OF KEY TERMS IN THE REPORT ............................................................................. 40

This Report reviews developments in international economic and exchange rate policies and is

submitted pursuant to the Omnibus Trade and Competitiveness Act of 1988, 22 U.S.C. § 5305,

and Section 701 of the Trade Facilitation and Trade Enforcement Act of 2015, 19 U.S.C. § 4421.1

   

 

1 The Treasury Department has consulted with the Board of Governors of the Federal Reserve System and

International Monetary Fund management and staff in preparing this Report.
1

Executive Summary

This Report is the second to implement the intensified evaluation provisions of

the Trade Facilitation and Trade Enforcement Act of 2015 (the “2015 Act”).2

  The

provisions of the 2015 Act provide the United States with valuable reporting

and monitoring tools, as well as measures to address unfair currency practices.  

The 2015 Act establishes a process to monitor key indicators related to foreign

exchange operations, engage economies that may be pursuing unfair practices,

and impose meaningful penalties on economies that fail to adopt appropriate

policies.  The legislation accomplishes these important goals in a way that is

consistent with our international obligations.  

The 2015 Act requires that Treasury undertake an enhanced analysis of exchange

rates and externally‐oriented policies for each major trading partner that has: (1)

a significant bilateral trade surplus with the United States, (2) a material current

account surplus, and (3) engaged in persistent one‐sided intervention in the

foreign exchange market.  Pursuant to the 2015 Act, Treasury has found in this

Report that no economy satisfied all three criteria.   

As noted in the April 2016 Report, Treasury has created a “Monitoring List” of

major trading partners that merit attention based on an analysis of the three

criteria.  Specifically, an economy is added to the Monitoring List when it meets

two of the three criteria.  Once added, an economy will remain on the Monitoring

List for at least two consecutive Reports to help ensure that any improvements in

performance versus the criteria are durable, not due to temporary one‐off

factors.  Six major trading partners of the United States are included on the

Monitoring List in this Report: China, Japan, Korea, Taiwan, Germany, and

Switzerland.   

China met two of the three criteria in the April 2016 Report – a large bilateral

trade surplus with the United States and a current account surplus above 3

percent of GDP – and it met one of the three criteria in this Report – a large

bilateral trade surplus with the United States.  Japan, Korea, and Germany met

two of the three criteria in both of the most recent reporting periods (April 2016

and October 2016), having material current account surpluses and significant

bilateral trade surpluses with the United States.  Taiwan also met two of the three

 

2 This Report is also responsive to the Omnibus Trade and Competitiveness Act of 1988 (the “1988 Act”).  
2

criteria in both of the most recent reporting periods, having a material current

account surplus and having engaged in persistent, one‐sided intervention in

foreign exchange markets.  Switzerland has been added to this Report as its trade

with the United States was sufficiently large as of June 2016 to be included as a

“major trading partner.”  Switzerland met two of the three criteria in this Report,

having a material current account surplus and having engaged in persistent, one‐

sided intervention in foreign exchange markets.   

The State of the Global Economy  

Global growth has been, and continues to be, soft relative to recent historical

averages.  Whereas the average pace of growth was 3.6 percent over the period

1990‐2006, growth was a modest 3.2 percent in 2015, and the IMF is projecting

growth of 3.1 percent in 2016.  Growth is expected to increase modestly in 2017.

A variety of factors have been holding back growth:  inadequate policy support,

especially from fiscal policy; continuing high leverage in both the private and

public sectors in many economies; demographic trends that are causing slower

growth in labor forces; weak investment, which may have adversely affected

productivity growth; and ongoing political uncertainty.  The productivity

slowdown is not yet well understood and may be protracted.  The pass‐through of

lower oil prices to higher spending appears to have been smaller than initially

anticipated, while the near‐term adverse effects expected from the surprise

Brexit vote have been muted thus far.

Monetary policy has been supportive in many economies, especially in Japan and

the euro area, and remains supportive in the United States.  Both nominal and

real interest rates are exceptionally low, but inflation is below target in most

major economies, reflecting to some extent weak demand in many parts of the

global economy.   

In February 2016, in Shanghai, G‐20 Finance Ministers and Central Bank

Governors for the first time committed to use all policy tools – fiscal, monetary,

and structural – to energize the global economy.  This is in contrast to the fiscal

austerity many policymakers advocated following the early stages of recovery

after the financial crisis in 2009.  G‐20 Leaders subsequently endorsed the use of

all policy tools at their Summit in Hangzhou in September.  Some economies – the

United States, Japan, and Canada – have responded by either using, or planning
3

to use, available fiscal space to support demand.  Other economies, especially

those with substantial balances of excess saving over investment – Germany,

Korea, and Taiwan – have substantial scope to support stronger national and

global demand growth, but have yet to adopt forceful pro‐growth programs.  

China can use consumption‐friendly stimulus to support demand if growth slows

more than expected as it implements its structural reform agenda.

Global trade continues to be surprisingly weak, expanding about 2.3 percent in

2016, according to the IMF’s latest forecast.  This may reflect the overall weak

global growth environment, but other factors also seem to be at play, as not all of

the slowdown is explained by slower GDP growth.  The IMF projects that global

trade will grow 3.7 percent in 2017, and 4.3 percent over the medium term.

Exchange rates have fluctuated in concert with shifting views about policy actions,

growth prospects, and capital flows.  The Japanese yen has appreciated sizably in

2016, while the Chinese RMB has depreciated.  The British pound has depreciated

significantly following the Brexit vote.  The euro and the U.S. dollar have held

generally steady, especially in nominal effective terms.  Dollar foreign exchange

markets have remained orderly even during periods of relatively rapid exchange

rate moves and higher short‐term spikes in volatility.         

Global current account imbalances continue to be an issue.  Though smaller in the

aggregate than at their peak in 2007, current account imbalances expanded

somewhat in 2015, and several economies – Germany, Korea, Switzerland, and

Taiwan – have very large external surpluses.  On the other side, the current

account deficits of Mexico and Canada have also increased.  While the current

account deficit in the United States is notably smaller than in 2007, it has

expanded from its level in 2013‐14.        

More support is needed to bolster global demand and help improve growth

expectations.  The Administration has strongly advocated that economies should

use all available policy space and all policy tools.  Faster nominal GDP growth is

essential to facilitate faster global debt adjustment, in turn leading to more

sustainable growth paths.  The Administration also has been a vocal advocate of

pursing global policies that lead to more inclusive growth and rising incomes for

lower income individuals and families.   
4

Treasury Assessments of Major Trading Partners  

As noted in Treasury’s April 2016 Report, Treasury has determined the following

thresholds for the three criteria for enhanced analysis specified in the 2015 Act:

(1) a significant bilateral trade surplus with the United States is larger than $20

billion; (2) a material current account surplus is larger than 3.0 percent of GDP;

and (3) persistent, one‐sided intervention includes net purchases of foreign

currency, conducted repeatedly, totaling in excess of 2 percent of an economy’s

GDP over a 12 month period.3

  No economy satisfied all three criteria in this

Report.

Treasury has created a “Monitoring List” of economies that have met two of the

three criteria specified in the 2015 Act.  In the April Report, the Monitoring List

included China, Japan, Korea, Taiwan, and Germany.  In this Report, the

Monitoring List includes China, Japan, Korea, Taiwan, Germany, and Switzerland.    

With regard to the six economies on the Monitoring List:  

    

 China has a significant bilateral trade surplus with the United States.  The

country’s current account surplus fell from 3.0 percent of GDP over the full

year 2015 to 2.4 percent for the four quarters through June 2016, moving

below the established threshold for that criterion.  China’s intervention in

foreign exchange markets has sought to prevent a rapid RMB depreciation that

would have negative consequences for the Chinese and global

economies.  Treasury estimates that from August 2015 through August 2016,

China sold more than $570 billion in foreign currency assets to prevent more

rapid RMB depreciation.  More transparency over exchange rate management

and goals, and strong adherence to G‐20 commitments to refrain from

competitive devaluation and not to target exchange rates for competitive

purposes, will enhance the credibility of China’s exchange rate regime.  At the

same time, China has a very large bilateral goods trade surplus with the United

States.  This underscores the need for further implementation of reforms to

rebalance the Chinese economy to household consumption.  Fiscal policy can

support structural reform and provide consumption‐friendly stimulus to

support demand if growth slows more than expected.         

 

3 See Section 3 for a discussion of the factors used to assess the three criteria which, taken together, would require

enhanced analysis.
5

 Japan has a significant bilateral trade surplus with the United States, and its

current account surplus for the last four quarters through June 2016 reached

the highest level since 2011, at about 3.7 percent.  Japan has not intervened in

the foreign exchange market in almost five years, but upward pressure on the

yen in 2016 has been accompanied by persistent public comments by Japanese

authorities aimed at restraining yen appreciation.  Treasury assesses that the

dollar‐yen foreign exchange market has been functioning smoothly, and

reiterates the importance of all countries adhering to their G‐20 and G‐7

commitments regarding exchange rate policies.  For Japan, it remains

important that the authorities use all policy levers, including a flexible fiscal

policy and an ambitious structural reform agenda, to lift near‐term growth and

inflation and improve the medium‐term economic outlook.   

 Korea has a significant bilateral trade surplus with the United States and a

current account surplus well above the material threshold.  Treasury estimates

that over the 12 months ending June 2016, Korea sold nearly $24 billion in

foreign exchange, representing a shift from several years of asymmetric

intervention to resist appreciation.  The IMF assesses the won to be

undervalued.  Over the medium term, appreciation of the won would help

Korea reorient its economy away from its reliance on exports by encouraging

the reallocation of resources to the non‐tradables sector.  Treasury has urged

Korea to limit its foreign exchange intervention to only circumstances of

disorderly market conditions.  In addition, Treasury continues to encourage

the Korean authorities to increase the transparency of their foreign exchange

operations and to take further steps to support domestic demand, including

more robust use of fiscal policy tools.   

 Taiwan has a current account surplus well above the material threshold and,

per Treasury estimates, has engaged in persistent net foreign currency

purchases in the 12 months through June 2016.  Such interventions limit

currency appreciation that would generally reduce Taiwan’s large and growing

current account surplus.  However, Taiwan’s bilateral trade surplus with the

United States was below the threshold, and thus Taiwan does not meet all

three criteria for enhanced analysis.  Taiwan’s authorities should limit foreign

exchange interventions to the exceptional circumstances of disorderly market

conditions, as well as increase the transparency of reserve holdings and

foreign exchange market intervention.
6

 Germany has both a significant bilateral trade surplus with the United States

and a current account surplus well above the material threshold.  The

European Central Bank (ECB) has not intervened in foreign currency markets

since 2011, and did so then as part of a G‐7 concerted intervention to stabilize

the yen following Japan’s earthquake and tsunami.4

  In nominal dollar terms,

Germany has the largest current account surplus globally.  This surplus

represents substantial excess saving – with the current account surplus sitting

at just over 9 percent of GDP in the second quarter of 2016.  Some of this

saving could, at least in part, be used to support German domestic demand

while also reducing the current account surplus and contributing markedly to

euro area and global rebalancing.  In Treasury’s view, Germany continues to

have substantial fiscal policy space to provide additional support to demand.  

It could also take steps to encourage private investment, which would support

demand.

 Switzerland has been added to this Report as its trade with the United States

was sufficiently large as of June 2016 to be included as a major trading

partner.  The country has a current account surplus well above the material

threshold and, per Treasury estimates, has engaged in significant foreign

currency purchases over the last year.  However, Switzerland’s bilateral trade

surplus with the United States was below the threshold, and thus Switzerland

did not meet all three criteria for enhanced analysis.  Moreover, Switzerland’s

economic policy situation is distinctive given its relatively small stock of

domestic assets, which limits monetary policy options to address persistent

deflation in the context of significant safe haven capital inflows.

While no economy met all three of the criteria for the current reporting period,

this result remains a reflection, in part, of the dynamics of the global economy

during the past year, in which capital outflows from emerging markets have led a

number of economies to engage in foreign exchange intervention to resist further

depreciation (rather than appreciation) of their currency.  The extent of these

flows has been high by historical standards, underscoring the possibility that more

economies may trigger the threshold going forward.   

 

4 For the purposes of Section 701 of the 2015 Act, policies of the ECB, which holds responsibility for monetary

policy for the euro area, will be assessed as the monetary authority of individual euro area countries.   
7

Based on the analysis in this Report, Treasury has also concluded that no major

trading partner of the United States met the standard of manipulating the rate of

exchange between its currency and the United States dollar for purposes of

preventing effective balance of payments adjustments or gaining unfair

competitive advantage in international trade during the period covered in the

Report.      

The Administration will continue to take effective actions to help ensure a level

playing field for our workers and companies.  The President has been clear that

no economy should grow its exports based on a persistently undervalued

exchange rate, and Treasury has been working aggressively to address exchange

rate issues bilaterally, including through the U.S.‐China Strategic and Economic

Dialogue, and multilaterally, including through the G‐7, G‐20, and the

International Monetary Fund (IMF).   

As noted in the April Report, this strategy has produced results.  The United States

has secured important commitments in recent years regarding exchange rate

policy from G‐7 and G‐20 members.  In particular, the G‐7 has committed to

orient fiscal and monetary policies towards domestic objectives using domestic

instruments and to not target exchange rates.  The G‐20 has committed to refrain

from competitive devaluations and to not target exchange rates for competitive

purposes.  This year, G‐20 members also agreed to consult closely on exchange

markets – an important component of G‐7 communiques in the past, but never

before included as a G‐20 commitment.   

Further, the IMF has improved the exchange rate analysis in its bilateral and

multilateral reports, and Treasury is working with the IMF to further strengthen

this analysis.  Treasury will continue to closely monitor adherence to all G‐7, G‐20,

and IMF exchange rate commitments.      

The Trans‐Pacific Partnership (TPP) countries have adopted – for the first time in

the context of a trade agreement – provisions that address unfair currency

practices.  When TPP comes into force, Treasury will be better able to monitor the

exchange rate commitments made by partner countries due to the transparency

and accountability provisions of the Joint Declaration of the Macroeconomic

Policy Authorities of TPP Countries.
8

Going forward, Treasury will benefit from the formation of an Advisory

Committee on International Exchange Rate Policy, established by the 2015 Act, to

provide advice to the Secretary of the Treasury with respect to the impact of

international exchange rates and financial policies on the economy of the United

States.  Pursuant to the 2015 Act, the Advisory Committee will be comprised of

nine members, with three appointed by the President, three by the President pro

tempore of the Senate, and three by the Speaker of the House of Representatives.  

Treasury has filed a charter for the Advisory Committee, in accordance with the

Federal Advisory Committee Act, and will work closely with the relevant members

of Congress to form the Advisory Committee as quickly as possible.   

Section 1: Global Economic and External Developments

This Report covers economic, trade, and exchange rate developments for the first

six months of 2016 and, where data are available, developments through end

September 2016.  The countries covered in this Report are the 12 largest trading

partners of the United States.  Their total goods trade with the United States

amounts to nearly $2.6 trillion over the last 12 months, or around 70 percent of

all U.S. goods trade.  For some parts of the analysis, especially those parts having

to do with Section 701 of the 2015 Act, data over the most recent four quarters

are considered.     

U.S. Domestic Economic Trends

In the second quarter of 2016, consumer spending growth strengthened in the

United States.  Net exports and business fixed investment also gave a small boost

to growth, but continued inventory adjustment, as well as declines in residential

investment and government spending, all subtracted from growth.  Economic

growth can be variable from quarter to quarter, and most projections point to an

acceleration of growth in the second half of 2016.  Although the pace of GDP

growth in the first half of 2016 has been relatively slow, the underlying strength

of the U.S. economy remains intact and features strong job creation, employment

close to the full‐employment level, and rising wages and incomes.   

Real GDP expanded at a 1.1 percent annual rate over the first two quarters of this

year after rising 1.4 percent in the latter half of 2015.  A further pullback in

inventory accumulation accounted for part of the slowdown in the first half of

2016, subtracting a quarterly average of 0.8 percentage point compared with a
9

drag of 0.5 percentage point during the latter half of 2015.  On net, weaker

business fixed investment, as well as softer residential investment, (after double‐

digit growth throughout 2015) played a role.  Net exports provided a small boost

to growth during the first half of 2016, after posing a drag in the latter half of last

year.  Consumer spending, which accounts for just over two‐thirds of all economic

activity in the United States, accelerated to a solid 3 percent pace during the first

half of this year, up from the 2.5 percent pace recorded during the latter half of

2015.        

Favorable Near‐Term Outlook for the U.S. Economy  

Domestic demand remains solid, consumer sentiment is around pre‐recession

norms, and the period of inventory adjustment appears to be drawing to a close.  

The current outlook suggests that real GDP will expand at a solid pace through the

end of 2016, led by healthy growth of consumer spending, further recovery in the

housing sector, and a small boost from government spending.  A consensus of

private forecasters predicts that, after average growth of about 1.1 percent in real

GDP during the first half of 2016, growth will pick up to around 2.5 percent in the

second half of 2016 and 2.2 percent in 2017.

Fiscal Headwinds Have Diminished

The rapid pace of fiscal consolidation in recent years has weighed on economic

activity in the United States, but it has moderated in the last six months.  During

the first half of 2016, federal government spending subtracted 0.1 percentage

point per quarter from real GDP growth, after a 0.15 percentage point

contribution during the latter half of 2015.  State and local outlays added slightly

to growth in the first half of 2016, after adding 0.1 percentage point in the latter

half of last year. Looking ahead, federal government spending is expected to

make a positive contribution to GDP in 2016 overall, and continued improvement

in state and local government finances has laid the groundwork for that sector to

be a small net positive for growth once again this year.   

Healthy Labor Market Conditions  

The pace of job creation remained robust during the first nine months of 2016,

and the unemployment rate remained at low levels.  Nonfarm payroll

employment increased 178,000 per month on average during the nine months
10

ending September 2016, compared with average monthly gains of 229,000 in

2015.  The unemployment rate currently stands at 5.0 percent, half its 2009 peak

of 10 percent.  Other indicators of labor utilization, including the rate of

involuntary part‐time employment, have improved thus far in 2016 but are still

elevated compared with pre‐recession levels, suggesting some slack remains in

labor markets.    

Headline and core (excluding energy and food prices) inflation rates have picked

up from year‐ago levels, but remain relatively low.  The consumer price index rose

1.1 percent during the year ending August 2016, compared with a 0.2 percent rise

during the year ending August 2015.  Core consumer inflation was 2.3 percent

over the year ending August 2016, up from 1.8 percent during the same period a

year earlier.  Compensation growth started to strengthen in late 2015, but

remains below its pre‐recession norms.  Average hourly earnings rose 2.4 percent

over the 12 months ending August 2016, stepping up from gains averaging 2.1

percent from 2011 through 2014.  The Employment Cost Index for private‐

industry workers showed compensation rising 2.4 percent over the 12 months

ending June 2016, up from a gain of 1.9 percent in the year‐earlier period.   

Public Finances on a Sustainable Medium‐Term Path

The federal budget deficit continued to narrow in FY 2015, declining to 2.5

percent of GDP from 2.8 percent of GDP in FY 2014.  Since peaking in 2009, the

deficit has fallen by 7.3 percentage points – the most rapid pace of fiscal

consolidation for any six‐year period since the demobilization following World

War II.  The Administration’s Mid‐Session Review of the FY 2017 Budget projects

the budget deficit will increase to 3.3 percent of GDP in FY 2016, then decline to

2.3 percent in FY 2018 and stabilize at 2.4 percent of GDP from FY 2022 to FY

2026 – well below the 40‐year average of 3.2 percent of GDP.  The primary deficit

(non‐interest outlays less receipts) will be eliminated by FY 2018, and will be

roughly neutral thereafter and not add to the federal debt.  Publicly‐held debt as

a share of the economy declined to 73.7 percent of GDP at the end of FY 2015; it

is projected to stabilize at 77.1 percent of GDP in FY 2017 and then decline

gradually to 75.0 percent by FY 2025.

U.S. External Trends

Developments in the U.S. Current Account and Trade Balances
11

The U.S. current account was in deficit by 2.7 percent of GDP in the first half of

2016, up marginally over the 2.6 percent deficit in the second half of 2015.   

Low oil prices have helped shrink

the U.S. petroleum deficit – it is at

its lowest level since 1998 at just

0.3 percent of GDP.  But the gains

from lower oil prices have been

offset by a decline in the services

trade surplus and a decline in

investment income (by $40 billion

over the past year) as earnings on

U.S. assets held abroad

decreased.  The non‐oil trade

balance has remained largely unchanged, as both exports and imports declined in

the year ending June 2016.

At the end of the second quarter of 2016, the U.S. net international investment

position stood at a deficit of $8.0 trillion (43.6 percent of GDP), an increase of

roughly $1.3 trillion over the period in 2015.  The value of U.S.‐owned foreign

assets was $24.5 trillion, while value of foreign‐owned U.S. assets stood at $32.5

trillion.  Much of the recent deterioration over the past year has been driven by

valuation effects that lowered the dollar value of U.S. assets held abroad.

The Dollar in Foreign Exchange Markets

The dollar depreciated on a

nominal trade‐weighted basis by

1.1 percent during the first half

of 2016, following a 6.5 percent

nominal trade‐weighted

appreciation in the second half

of 2015.   

The dollar depreciated by about

4 percent against the currencies

of advanced economies in the

‐7

‐6

‐5

‐4

‐3

‐2

‐1

0

2005 2006 2007 2009 2010 2011 2013 2014 2015

Percent of GDP

Oil Balance

Non‐Oil Balance

U.S. Goods Balance

Sources: U.S. Bureau of Economic Analysis

0

20

40

60

80

100

120

140

160

1973 1979 1985 1991 1997 2003 2009 2015

Index (Jan. 1997 = 100)

Broad Major EMs

Nominal Trade‐Weighted Dollar

Sources: Federal Reserve Board; and Haver Analytics
12

first half of 2016.  This reflects the 14 percent depreciation of the dollar against

the Japanese yen, partially offset by the 10 percent appreciation against the

British pound.  The dollar/euro relationship was mostly stable through the first

half of 2016.  Since June, through end‐September, the dollar has seen slight

further depreciation against the yen, moving within the 100‐106 yen/dollar band;

and remained unchanged against the euro.  Over that same period, the dollar was

relatively stable against the British pound, but in the first half of October, the

British pound depreciated by more than 5 percent.    

Against the currencies of

emerging market economies,

the dollar appreciated

0.8 percent in the first half of

2016.  Since June, through end‐

September, the dollar was

unchanged on a nominal

effective basis against

emerging market currencies.    

Bilaterally, year‐to‐date as of

September, the dollar has appreciated against the British pound, the Mexican

peso, and the Chinese renminbi.  It has depreciated against the euro, the

Japanese yen, the Korean won, the Swiss franc, the Canadian dollar, and the new

Taiwan dollar.  Some of the 2016 currency movements are reversals, to varying

degrees, of currency movements in 2015.   

Dollar exchange markets have functioned smoothly and with low levels of

volatility notwithstanding periodic concerns over disappointing global growth

outcomes, a surprise Brexit vote in the United Kingdom, the unprecedented use

of negative interest rates in some economies to boost credit flows, and shifting

views on potential monetary policy adjustments by central banks in the major

currencies.  The U.S. dollar continues to be the world’s principal currency in

international trade, with it being bought or sold in 88 percent of all currency

trades according to the most recent (2016) BIS Triennial Survey of foreign

exchange activity.  

‐20 ‐15 ‐10 ‐5 0 5 10 15 20

Japan

Korea

Canada

Taiwan

Euro

Switzerland

China

Mexico

UK

Percent Change

2016

2015

U.S. Dollar vs. Major Trading Partner Currencies

(+ denotes dollar appreciation)

Sources: FRB; and Haver Analytics.
13

International Economic Trends

The growth trajectory of the

global economy continues to be

tepid and markedly weaker than

the 3.6 percent average pace of

growth over the period 1990 to

2006.  Global growth since 2011

has averaged a modest

3.3 percent, leaving many

economies with overly high

unemployment and

underutilization of productive

capacity.  Global GDP growth in

the first half of 2016 was 2.9 percent, based on estimates from the IMF’s World

Economic Outlook.  Additionally, the distribution of global demand is highly

imbalanced, with large and sustained external surpluses in a handful of countries,

which have the effect of absorbing demand from the rest of the world and

dampening global aggregate demand.    

Growth in the euro area averaged 1.6 percent in the first half of 2016,

0.4 percentage point less than 2015 growth.  The average contribution of

domestic demand to growth was just 0.8 percent annualized, far less than the

1.8 percent contribution posted in 2015, mostly due to weak investment.  

Germany, the euro area’s largest economy, grew a solid 2.3 percent on average

during the first half of 2016, but domestic demand’s contribution to growth was

only an average of 0.6 percentage points, again due to slumping fixed investment.

Growth in Japan was 1.4 percent in the first half of 2016, with domestic demand

adding an average of 1.7 percentage points per quarter, but declining real exports

reduced the pace of growth.  In part reflecting the weak growth outlook, Japan

has chosen to once again postpone a planned hike in the consumption tax and is

commencing implementation of a package of fiscal stimulus measures that will

include social spending to encourage greater labor force participation and direct

payouts to low‐income earners.

The IMF, in its October 2016 forecast, projects that advanced economies will grow

1.6 percent in 2016, the same weak pace they have averaged since 2011, picking

‐1

0

1

2

3

4

5

6

7

8

Percent (year‐over‐year)

2016H1

Average 2011‐2015

GDP Growth

Sources: National Authorities; and Haver Analytics.
14

up to 1.8 percent in 2017.  Japan is expected to grow 0.5 percent, the United

States 1.6 percent, and the euro area 1.7 percent.  The United States is expected

to accelerate to 2.2 percent in 2017, while Japan is expected to grow 0.6 percent

in 2017, and the euro area 1.5 percent.   

Emerging market economy growth is expected to be 4.2 percent in 2016, well

below their 5 percent pace since 2011, but consistent with the steady downshift

in the growth rate of emerging markets over the past five years.  The IMF expects

growth in emerging markets to pick up to 4.6 percent in 2017, largely reflecting

reversals in Russia and Brazil from recession to growth.  Emerging Asia is

projected to slow in 2017, as is emerging Europe.  

   

Overall global growth is being held back by (1) inadequate macroeconomic policy

support, (2) still high private sector leverage in some economies, and (3) sluggish

lending growth in some economies.  Weak investment is often cited as a

contributing factor to subdued global growth, but investment tends to follow GDP

growth.  Still, as noted, some countries could take steps to lift both private and

public investment.  More policy action is needed globally to strengthen domestic

demand.  Monetary policy responses have been forceful in general, but they need

to be supported with additional fiscal actions to deliver a stronger boost to

domestic demand.  Policy space exists as exceptionally low long‐term interest

rates provide governments with more fiscal breathing room than under

historically normal circumstances.  And there are a number of advanced and

emerging market economies with large external surpluses – including Germany,

Korea, and Taiwan – that could improve domestic demand growth in their own

economies and contribute both to stronger global growth and to a more balanced

global economy.  

Global current account

imbalances diminished in the

aftermath of the global

financial crisis, mainly because

of compressed imports by

deficit economies rather than

because of stronger demand in

surplus economies.   

Imbalances began widening

‐3

‐2

‐1

0

1

2

3

2005Q1 2007Q1 2009Q1 2011Q1 2013Q1 2015Q1

Percent of Global GDP

China Germany Other Euro Area

Other Surplus Other East Asia Oil

Discrepancy Other Deficit US

Global Current Account Imbalances

Sources: Haver Analytics; IMF WEO; and National Authorities
15

again in late 2014 and early 2015, but have eased in recent quarters.  Some

surpluses, however, still remain exceptionally large and indicate that these

countries are absorbing demand from the rest of the world to sustain stronger

growth at home than would otherwise be the case.  As such, large surpluses

depress global aggregate demand, highlighting the urgency of deploying all policy

levers to boost strong, sustainable, balanced, and inclusive growth.  The very

large surpluses of Taiwan, Switzerland, Germany, and Korea have each remained

significant in the first half of 2016.  Adding in Japan, the surpluses (excess of

saving over investment) of these economies totaled around $720 billion over the

four quarters ending June 2016.  China’s surplus of around 3 percent of GDP in

2015 has since declined to 2 percent of GDP in the first half of 2016.  

The decline in the price of oil has been a key factor in redistributing income from

oil exporting to oil importing economies, and that is one reason for the expanding

surpluses of some economies.  But even if the price of oil were to have stayed

around $80 per barrel, Taiwan, Germany, and Korea would still have large

surpluses, at around 12.8, 8.5, and 6.2 percent of GDP, respectively.     

China

China’s reported current account

surplus for the first half of 2016

was $103 billion (2.0 percent of

GDP), compared with $157 billion

(2.7 percent of GDP) in the

second half of 2015.  China’s

current account surplus was

2.4 percent of GDP for the

12 months ending June 2016,

narrowing from 3.2 percent of

GDP for the 12 months ending

June 2015.  The current account surplus declined, owing to a larger services trade

deficit and a modest decline in the merchandise trade surplus.  From July 2015 to

June 2016, merchandise export volumes and values contracted by 0.4 percent and

6.9 percent, respectively.  During the same period, merchandise import volumes

grew 2.5 percent, but nominal value fell 11.8 percent, reflecting still‐depressed

commodity prices.  Tourism imports continued to drive China’s services trade

deficit, which grew from 1.7 percent of GDP in the four quarters ending June 2015
16

to 2 percent of GDP in the four quarters ending June 2016.  Treasury analysis of

partner tourism trade data suggests that tourism imports have partially masked

capital outflows in late 2014 and 2015, and that the current account surplus is

likely larger than reported, possibly approaching 3 percent of GDP.  While data

are uncertain, recent data suggest that outflows through this channel have fallen.   

China runs a merchandise trade surplus and a services deficit with the United

States.  For the 12 months ending June 2016, China’s merchandise trade surplus

with the United States was $356 billion, as compared with $363 billion for the

12 months ending June 2015, according to U.S. Census data.  The United States

has a surplus of roughly $35 billion in trade in services with China, making China’s

bilateral trade in goods and services balance with the United States a bit lower.  

Since February 2016, China’s

central bank, the People’s Bank

of China (PBOC), has sought to

improve communications on its

exchange‐rate policy with the

market, after its unanticipated

change in the midpoint fixing

mechanism in August 2015 and

weaker‐than‐expected reference

rates in early January 2016

triggered large capital outflows.  

The PBOC has clarified its

intention to manage the RMB

flexibly, stating that it sets the

daily reference rate based on

overnight movements in key

currencies, the previous day’s

closing rate, and expected

demand for foreign currencies

during the day.  In addition, the

PBOC has communicated that it

references three baskets,

including a basket that the China

Foreign Exchange Trading

System (CFETS) – a unit under the PBOC – introduced last December.  The CFETS
17

basket – the most commonly cited basket – has weakened 6.8 percent year‐to‐

date as of September and 10.8 percent from its peak August 2015.  Consistent

with the decline in the CFETS basket, the real effective exchange rate has

weakened 7.2 percent year‐to‐date.  Meanwhile, the RMB has depreciated

2.7 percent against the dollar year‐to‐date and 6.9 percent since August 2015.  

Notwithstanding these changes, market participants remain highly sensitive to

signals from the Chinese authorities on the exchange rate, highlighting the

importance of the clear communication of policy actions and greater

transparency.

While China does not publish

its foreign exchange

intervention, it is possible to

construct estimates of foreign

exchange market intervention

using data that China does

publish.  China has intervened

heavily in the foreign exchange

markets to prevent even faster

RMB depreciation after strong

downward market pressure

triggered by the surprise change in China’s foreign exchange policy in August

2015.  The pace of net foreign exchange sales has slowed in recent months to

$20‐30 billion on strengthened enforcement of capital controls, a favorable

external environment, and improved market communication.  This underscores

that additional Chinese efforts to clarify its exchange rate goals, and to

underscore that devaluation will not be used to support growth, would help

stabilize the foreign exchange market.  Treasury estimates that from August 2015

through August 2016, China sold more than $570 billion in foreign currency assets

to prevent faster RMB depreciation.  Despite recent sales, China maintains ample

reserves of roughly $3.2 trillion as of end‐September 2016.  

At the 2016 U.S.‐China Strategic and Economic Dialogue, China committed to

continue market‐oriented exchange rate reform, allowing for two‐way flexibility.  

China also stressed that there is no basis for persistent RMB depreciation based

on economic fundamentals.  China reaffirmed these statements publicly as part of

President Xi’s meeting with President Obama in September.  Core factors that

have been supportive of the RMB remain in place, including high net savings, a
18

sizeable current account surplus, GDP growth above the global average, and still‐

strong terms of trade reflecting lower commodity prices.   

Despite the recent downward pressure on the RMB, the Chinese currency is still

21 percent stronger than the dollar since December 2005, and 38 percent

stronger on a real, trade‐weighted basis.  Chinese authorities have stressed that

the RMB will continue to be a strong currency, given China's current account

surplus, relatively high economic growth, large foreign exchange reserves, and

stable fiscal and financial conditions.  Overall, the balance of evidence suggests

that the RMB is likely to continue to trend stronger over the medium to long

term.  

Expectations that the Chinese currency would depreciate in the short term have

contributed to capital flows through a number of different channels.  Net private

outflows from China have stemmed in large part from a rebalancing in Chinese

corporate balance sheets and outbound Chinese foreign direct investment (FDI).  

As a result, the net foreign assets of Chinese firms have risen to a historical high

of roughly $450 billion as of the second quarter of 2016.  In the first six months of

2016, China recorded net FDI outflows of $47 billion.  Separately, Treasury

analysis of tourist spending – which rose sharply and abruptly in late 2015 –

suggests that tourism spending abroad masked capital outflows.  

China has the policy tools – monetary, fiscal, and structural – to foster confidence

and create the conditions for an orderly transition to a market‐determined

exchange rate.  Fiscal policy should be used flexibly to strengthen growth, job

creation, and household demand, and can complement and support the

implementation of China’s structural reform agenda.  China has laid out an

ambitious structural reform agenda, which includes measures to stem the rise of

corporate leverage, allow for a market‐determined allocation of credit, open the

services sector to competition, and strengthen the social safety net.  Full

implementation of this agenda will facilitate a shift in the economy away from a

dependence on investment toward household consumption.  Structural problems,

including excess capacity in some industries, exacerbated by a weak global

economic recovery and depressed market demand, have caused a negative

impact on trade and workers globally.  China has committed to undertake further

steps to resolve its domestic excess capacity, including in the steel and aluminum

sectors, and has outlined a package of structural reform policies that would

enable its industries to be more responsive to market forces.  
19

Japan

Prime Minister Abe continues to pursue his economic revitalization plan known as

“Abenomics,” and recent announcements have focused on fiscal policy actions.  In

May, the Prime Minister decided to postpone the consumption tax increase

planned for 2017, and in August he announced the largest stimulus package of his

administration at nearly 6 percent of GDP, although new spending will only

account for roughly a quarter of the headline number.  As for monetary policy,

the Bank of Japan (BOJ) surprised markets in January 2016 by introducing

negative interest rates on a portion of excess bank reserves.  In September, the

BOJ fundamentally shifted its policy focus from targeting monetary base

expansion to “yield curve control,” or targeting short‐term interest rates and

long‐dated yields, accompanied by an “inflation‐overshooting commitment” in

order to further support inflation expectations.  Analysts have interpreted the

regime change as providing the BOJ greater flexibility to execute its monetary

policy, including by giving it more room to further lower negative rates if

necessary.  Structural reform has seen progress in select areas such as corporate

governance, but parliamentary ratification of TPP and Prime Minister Abe’s ability

to enact challenging reforms in the labor market and the services sector remain

essential.

Japan’s current account continued

to widen in the first half of 2016,

reaching a surplus of $86 billion

(3.8 percent of GDP), compared

with $63 billion (3.0 percent of

GDP) in the first half of 2015.  For

the 12 months ending June 2016,

the current account registered a

surplus of 3.7 percent of GDP, a

substantial increase from 2.4

percent for the 12 months ending

June 2015, and the highest 12‐

month surplus since 2011.  The widening current account has been driven by

strong net foreign income as well as an improvement in the trade balance due to

(1) the re‐emergence of a goods surplus for the first time in six years, (2) lower oil

prices that reduce the import bill, and (3) a lower services deficit underpinned by
20

increased tourism from China.  Japan’s seasonally adjusted trade balance (goods

and services) turned to a surplus in late‐2015 and continued to widen in 2016 on

contracting imports, , climbing in August to the largest level since 2010.  Export

volumes fell by 2.3 percent in the first half of 2016 as compared with the first half

of 2015.  For the 12 months ending June 2016, Japan’s merchandise trade surplus

with the United States was $67.6 billion, as compared with $69.0 billion for the

12 months ending June 2015.  Including services, Japan’s overall trade surplus

(merchandise plus services, seasonally adjusted) with the United States was

$55.2 billion for the same period.

Year‐to‐date, the yen has

appreciated 18.7 percent against

the dollar as of end‐September

and 18.0 percent on a real

effective basis as of end‐August.  

Yen appreciation has been

reinforced throughout the year by

(1) the yen’s safe haven appeal

amid a retreat in global risk assets,

particularly following the Brexit

referendum; and (2) a slower‐

than‐anticipated interest rate hike cycle in the United States, resulting in a

narrower interest‐rate differential between Japan and the United States.  In

addition, the BOJ’s decision to adopt a negative interest rate policy in January led

to market speculation that the unconventional policy raised concern that the BOJ

was running out of tools to achieve its two percent inflation target.  Japan has not

intervened in the foreign exchange market in almost five years, but authorities

have made persistent public statements to restrain appreciation in 2016,

characterizing yen/dollar movements as “rough” and warning that they “will take

firm action” if necessary.   

Treasury assesses that the dollar‐yen foreign exchange market has been

functioning smoothly, and reiterates the importance of all countries adhering to

their G‐20 and G‐7 commitments regarding exchange rate policies.  In the context

of the G‐7 and G‐20, Japan has committed to use all policy tools – monetary,

fiscal, and structural – to foster confidence and strengthen the recovery, and

affirmed that monetary policy alone cannot lead to balanced growth.  The IMF in

2015 evaluated Japan’s real effective exchange rate to be moderately weaker
21

than a level consistent with fundamentals, but as of mid‐2016, the IMF estimated

that the yen had moved to a level consistent with medium‐term fundamentals.

      

Given Japan’s weak growth outlook and continuing weakness in global demand, it

is increasingly important that the authorities use all policy levers, including

implementation of a flexible fiscal policy in the near‐term, to avoid a

contractionary fiscal impulse.  Japan’s fiscal plan unveiled in August – particularly

measures to improve workforce participation and direct payouts to low‐income

earners – appears consistent with this.  Authorities must also complement

monetary and fiscal support with structural reform policies that prioritize near‐

term growth (such as policies to raise wages and revitalize local economies) while

continuing to push for reforms with longer‐term benefits (such as a stronger R&D

infrastructure).  Ratification of TPP by Japan’s parliament would be an important

first step toward much needed reform in protected sectors such as agriculture

and automobiles.

Korea

Exports continue to play a dominant role in the Korean economy (greater than

50 percent of GDP), which highlights the need for Korea to continue rebalancing

toward domestic demand.  Historically, Korea has intervened at times on both

sides of the foreign exchange market, but on net has resisted appreciation,

including strongly so when the won was subject to sustained appreciation

pressure.  Over the 12 months ending June 2016, Korea experienced capital

outflows, and the Korean authorities have intervened on net to limit won

depreciation.   

In June, the Korean authorities announced a fiscal package to help industrial

sectors undergoing restructuring.  The package focused on measures to facilitate

corporate restructuring, invest in infrastructure, provide financial support to

small‐ and medium‐sized enterprises, and provide larger unemployment benefits.  

While the announced measures will be complemented by tax benefits for

replacing older cars and rebates for home appliances to support domestic

demand, the overall impact on growth will likely be quite limited as the package

was entirely funded by government revenue over‐performance and is being used

partially to retire government debt.  Furthermore, the proposed 2017 budget will

represent consolidation of 0.5 percent of GDP.  
22

Korea’s current account surplus for

the first half of 2016 reached

8.3 percent of GDP ($57 billion), the

second largest as a percent of GDP

among G‐20 countries, just after

Germany, and up slightly from

7.9 percent of GDP in the first half

of 2015.  For the 12 months ending

June 2016, the current account

surplus rose to 7.9 percent of GDP,

from 7.0 percent of GDP for the 12

months ending June 2015.  The

larger current account surplus owed to a growing goods surplus – a function of

lower import prices, particularly for energy and other commodity imports – and

real merchandise export growth, which, at 3.8 percent, outpaced real

merchandise import growth of 2.3 percent from July 2015 to June 2016.  Korea’s

merchandise trade surplus with the United States totaled $30 billion over the

same 12 month time period, while the combined trade and services surplus was

lower, at $21 billion.  In the first six months of 2016, Korea’s merchandise trade

surplus with the United States totaled $16.5 billion; the combined trade and

services surplus was lower, at $11.4 billion, over the same period.   

From July 2015 to June 2016, the

won depreciated 3.5 percent

against the dollar and 3.5 percent

on a real effective basis.  Year‐to‐

date through September, the won

has appreciated 6.5 percent

against the dollar and 3.0 percent

on a real effective basis.  Korea

officially maintains a market‐

determined exchange rate, and

the authorities intervene with the

stated objective of smoothing

won volatility.  Korea has committed in the G‐20 to refrain from competitive

devaluation and not target its exchange rate for competitive purposes.  The IMF’s

2016 External Sector Report assessed that Korea’s real effective exchange rate

was 4 to 12 percent weaker than the level consistent with fundamentals and
23

desired policies, and Korea’s external position was judged substantially stronger

than that implied by medium‐term fundamentals and desirable policies.   

Unlike many other major

emerging markets and

industrialized economies, Korea

does not publish foreign

exchange market intervention.  

Treasury estimates that in the

first half of 2016, the Korean

authorities intervened both to

resist appreciation and to resist

depreciation of the won, and on

net sold an estimated $9.5 billion

in foreign exchange.  For the 12 months ending June 2016, Treasury assesses that

on net the authorities intervened to support the won, selling an estimated $24

billion (1.8 percent of GDP) in foreign exchange, including activity in the forward

market.  More recently, Treasury estimates Korea has, on net, purchased $9.3

billion in foreign exchange in July and August to limit won appreciation.  Korea

maintains ample reserves at $369 billion as of September 2016, equal to roughly

350 percent of short‐term external debt and 27 percent of GDP.  

Given Korea’s growth slowdown, external headwinds, and fiscal space, it is

important that Korea use all policy levers, including near‐term fiscal support, to

avoid a contractionary fiscal impulse.  While the Bank of Korea has cut its policy

rate five times since August 2014, and most recently in June 2016 to 1.25 percent,

fiscal support has been more limited.  Appreciation of the won over the medium

term would help to narrow Korea’s large and growing current account surplus,

and reorient its economy away from its heavy reliance on exports by encouraging

the reallocation of resources to the non‐tradables sector.  Treasury has urged

Korea to limit its foreign exchange intervention to only circumstances of

disorderly market conditions, and to increase the transparency of its foreign

exchange operations.  

Taiwan

Taiwan’s economy recovered moderately after falling into recession in 2015, with

GDP growth of 3.4 percent and 0.2 percent annualized in the first and second
24

quarters of 2016, respectively.  Investment growth rebounded moderately in the

second quarter, while private consumption growth slowed and the contribution

of net exports to overall growth was negative.

Taiwan’s current account surplus

for the first half of 2016 reached

$37.6 billion (14.6 percent of

GDP), broadly unchanged from

first half of 2015.  For the

12 months ending June 2016, the

current account surplus reached

$76 billion (14.8 percent of GDP)

compared to $71 billion

(13.2 percent of GDP) in the

previous 12 months ending June

2015.  Both imports and exports

showed year‐on‐year declines in the July 2015 to June 2016 period, with a larger

decline in imports.  The decline in exports was driven by a fall in export prices as

export volumes increased slightly.  The fall in imports was due to declines in both

volumes and values.  For the 12 months ending June 2016, Taiwan’s merchandise

trade surplus with the United States was $13.6 billion, as compared with

$15.3 billion for the 12 months ending June 2015.  

  

Year‐to‐date, as of September, the

new Taiwan dollar has

appreciated 4.9 percent against

the dollar, after depreciating

6.1 percent in the second half of

2015, and 1.1 percent on a real

effective basis.  Taiwan officially

maintains a managed peg

exchange rate, and its stated

currency policy is to smooth

volatility and intervene only when

the market is “disrupted by seasonal or irregular factors.”  The Peterson Institute

for International Economics estimated in May 2016 that Taiwan’s real effective

exchange rate was undervalued, and would need to appreciate by 25 percent to

bring Taiwan’s current account surplus down to 3 percent of GDP.   
25

Treasury estimates that Taiwan’s

authorities continued to make net

foreign currency purchases through

the first half of 2016, with net foreign

exchange purchases averaging

$1 billion per month in the second

half of 2015 and the first half of 2016.

Treasury estimates Taiwan continued

net foreign exchange purchases of

$1 billion in July.  As Taiwan does not

publicize its foreign currency

intervention, Treasury estimates

Taiwan’s intervention by taking the change in the central bank’s net foreign assets

and subtracting estimated income on its reserves; intervention estimates are

therefore sensitive to the rate of return assumed to be earned on reserves.  

Beginning in April, intraday foreign exchange activity suggests that the central

bank reduced the frequency and volume of its intervention at the end of the

trading day, which many market participants had viewed as a preference for

currency depreciation.  Foreign exchange reserves totaled $437 billion

(85 percent of GDP and 290 percent of short‐term external liabilities) at the end

of September 2016, an increase of $11 billion from the end of 2015.     

Taiwan should increase the transparency of its reserve holdings and foreign

exchange market intervention, which would limit the need for outside estimates.  

Although not a member of the IMF, Taiwan uses the IMF’s Special Data

Dissemination Standard (SDDS) framework to provide data on many aspects of its

economy, including the real, fiscal, financial, and many of the external sector

accounts.  Taiwan does not, however, publish data on the full details of its

international reserves in accordance to the SDDS reserves template.  Taiwan is

the only major emerging market economy in Asia not to report reserves data

based on the SDDS template.  

The Euro Area

The euro area economy strengthened moderately in the first half of 2016,

supported by low commodity prices and monetary stimulus.  Growth, however,

decelerated in the second quarter, declining to 1.2 percent annualized, down
26

from 2.0 percent in the first quarter.  Whereas real GDP growth was driven by

domestic demand throughout 2015 and into the first quarter of 2016, domestic

demand stagnated in the second quarter of 2016.  Private consumption

contributed only mildly to growth and investment declined in the second quarter,

while net export growth improved.  For the year, the IMF projects growth of

1.7 percent, down from 2.0 percent in 2015.  Uncertainty stemming from the

Brexit vote may weigh on investment and growth in the second half of the year. 

Inflation also remains well below the European Central Bank’s target, while

banking sector weaknesses in several countries pose an additional risk.   

The euro area current account surplus expanded significantly in 2015, to

3.2 percent of GDP, driven in large part by an increase in the German current

account, which increased to 8.5 percent of GDP.  The euro area current account

surplus rose further in the first half of 2016 to 3.4 percent.  Although the pace of

expansion has moderated compared to last year, the increase in the German

current account surplus (to 9.4 percent of GDP in the first half of 2016) remains a

large driver of growth.  Much of the increase continues to reflect lower

commodity prices and weak investment spending.  In particular, investment

spending declined in the first half of 2016 and remains 14 percent below its pre‐

crisis peak.  Additionally, most euro area periphery economies continue to run

small current account surpluses due to policy adjustments affecting internal

demand following years of sustained current account deficits.     

After weakening by over 12 percent against the dollar in 2015, the euro has

appreciated slightly against the dollar in 2016, by 2.7 percent through end‐

September.  In nominal and real effective terms, the euro has appreciated by

about 1.8 and 1.6 percent, respectively, in 2016 through end‐September.   

It is critical for euro area economies to deploy a more balanced set of tools,

including fiscal and structural policies, to provide support to domestic demand,

particularly investment.  Several countries – including Germany – have the fiscal

space to provide more support for domestic demand.  Boosting demand growth

through increased fiscal support for infrastructure investment and greater private

consumption is essential to sustaining the euro area recovery.  The adjustment

process, both within the euro area and globally, would function better if countries

with large current account surpluses took strong action to boost investment and

domestic demand so as to exceed GDP growth.  
27

Euro area authorities should also take additional steps to accelerate the balance

sheet adjustment of banks, with many burdened by a large portion of non‐

performing loans.  A faster pace of balance sheet adjustment could improve the

ECB’s monetary policy transmission channel to the real economy and improve

productivity growth.

Switzerland

The Swiss current account

surplus expanded from 8.8

percent of GDP in 2014 to 11.4

percent in 2015.  The increase

in the current account was

driven by a 7 percent decline in

nominal goods imports

resulting from lower domestic

demand, lower commodity

prices, and a more appreciated

Swiss franc.  For the 12 months

ending June 2016, the current account surplus decreased slightly to 10.0 percent

of GDP.  The IMF assesses that Switzerland’s persistently large current account

surpluses are driven to some extent by non‐traditional factors such as commodity

trading, financial and insurance services, and net FDI earnings “whose savings

may not be fundamentally Swiss.”  The IMF also finds that the association

between the Swiss real effective exchange rate and current account is “mild.”  In

2016, through August, the Swiss franc has been roughly flat on a real and nominal

effective basis, after appreciating 5.4 percent and 7.9 percent, respectively, in

2015, following the January 2015 removal of the exchange rate floor.  Since end‐

2014, through end‐September 2016, the Swiss franc has appreciated 2.1 percent

against the dollar and 9.9 percent against the euro.

During the first and second quarters of 2016, Switzerland posted 1.4 percent and

2.5 percent growth (quarter‐on‐quarter, annualized).  The Swiss National Bank

(SNB) projects that economic growth will be 1.5 percent in 2016, up from

0.8 percent in 2015.  Unemployment is rising, but still remains low at

3.3 percent.  Deflation continues to dominate the price landscape with the central

bank forecasting ‐0.4 percent in 2016 and 0.3 percent in 2017.  The latest inflation

print in August 2016 was ‐0.1 percent year‐on‐year.  Switzerland continues to rely
28

on an expansionary monetary policy as its main tool to spur growth and inflation,

with negative interest rates and intervention in the foreign exchange market to

contain appreciation pressure on the franc.  Fiscal policy is constrained by

Switzerland’s fiscal rules despite very low borrowing costs.   

The SNB has consistently been

a net buyer of foreign assets

after it abandoned the

1.20 Swiss francs per euro

floor in mid‐January

2015.  These foreign asset

purchases follow the SNB’s

stated policy to “remain active

in the foreign exchange

market, as necessary,” and its

assessment that “the Swiss

franc is still significantly overvalued.”  The IMF agrees that the Swiss franc is

overvalued, though classifies it as moderately overvalued.  A relatively small stock

of domestic assets limits the SNB’s ability to conduct a domestic asset purchase

program similar to other central banks in the post‐crisis period.  The SNB’s recent

foreign asset purchases are primarily a monetary tool to try to stem safe haven

inflows and meet its inflation target, as further appreciation of the franc would

add to deflationary pressures.  Switzerland has experienced persistent deflation

since 2012 despite full utilization of traditional monetary policy tools as well as

negative interest rates.  Treasury estimates that the SNB’s net foreign currency

purchases totaled $60 billion over the last 12 months ending June 2016.  Reserves

increased by $70 billion during the same period and stood at $624 billion as of

end‐June 2016 (95 percent of GDP).  Treasury encourages the Swiss authorities to

publish all intervention data.

United Kingdom and Brexit

Global financial markets reacted sharply and swiftly to the outcome of the United

Kingdom (UK) vote on June 23 in favor of exiting the European Union.  Equity

markets, particularly financial sector indices, came under significant pressure,

euro area sovereign periphery yields increased, and the sterling and euro

weakened against the dollar by over 11 percent and 3 percent, respectively, in the

two trading sessions after the vote.  Since then, equities have largely retraced
29

their losses and periphery yields have tightened.  The pound had stabilized until

the beginning of October, and since then it has depreciated by more than 5

percent against the dollar.  Improving investor sentiment has been supported by

the faster‐than‐expected formation of the UK government, accommodative

monetary policy by the Bank of England (BoE), a weaker exchange rate, and

better‐than‐expected economic data in the UK and euro area in July and August.  

Importantly, signals from UK authorities that they are prepared to use fiscal policy

to support growth have also improved sentiment.

Prior to and through the referendum, UK economic growth was solid – second

quarter GDP growth came in at 2.2 percent year‐on‐year, up from 2.0 percent in

the first quarter.  Since the vote, high frequency indicators have been mixed,

though still point to growth moderation.  The composite PMI fell by 5 points to

47.5 in July, the lowest level since April 2009, but then more than retraced in

August to 53.6.  July manufacturing production (a component of industrial

production), however, indicated a contraction in British manufacturing of

0.9 percent over the previous month.  The IMF estimates that Brexit uncertainty

could reduce UK growth by around 1.2 percent – relative to baseline forecasts –

through 2017.  To help support growth, the BoE eased monetary policy in July by

cutting interest rates and augmenting and broadening its quantitative easing

program.  The BoE also signaled a willingness to cut rates further, stopping short

of negative interest rates.   

The UK continues to run a large current account deficit, which was 5.4 percent of

GDP in 2015, driven by wide goods and primary income deficits.  In the fourth

quarter of 2015, the current account deficit came in at 7.0 percent of GDP, the

largest ever quarterly peace time deficit, before narrowing slightly to 5.8 percent

in the first half of 2016.  The recent depreciation of the pound may improve the

current account deficit by increasing the value of income from investments

abroad, boosting goods exports, and suppressing imports.  

The UK authorities announced plans to begin formal exit talks with the EU starting

in the first quarter of 2017.  Treasury encourages both sides to engage in a

smooth, transparent, and pragmatic manner.  Maintaining a highly integrated

economic relationship would support global growth, trade, and financial stability.   
30

International Capital Flows  

Global private capital has generally

flowed to emerging markets.  That

reversed in a large way in 2015, as

diminished growth prospects due to

a sharp fall in commodity prices, as

well as increased risk aversion by

investors, sales of foreign assets by

foreign central banks to defend

against currency depreciation, and

expectations of monetary policy

adjustments, particularly in the United States, induced capital outflows from

emerging markets.   

Private outflows continued in the early part of 2016, the vast majority of which

were from China, as other emerging market economies were again experiencing

net inflows in the first part of 2016.  

  

Net private outflows from China have been driven largely by a rebalancing in

Chinese corporate balance sheets and outward Chinese FDI rather than a broader

flight of resident investment in domestic assets.  Recent high frequency data

indicate that net outflows from China continued in the second and third quarters,

but at a more moderate pace.

Net capital flows to other emerging markets recovered slightly during the first

quarter of 2016 relative to last year.  Preliminary data for the second quarter,

along with high frequency data from the third quarter, indicate a stronger pace of

capital inflows to emerging markets during the middle part of 2016.  Portfolio

inflows, both in debt and equity assets, recovered substantially during the second

quarter.  The flows appear to be broad based across emerging market economies.  

The extent to which countries have robust and healthy financial sectors –

including deep capital markets and adequate capital buffers – will likely improve

financial intermediation, contribute to real‐sector growth, and dampen the

volatility of capital flows in response to shocks.

‐800

‐600

‐400

‐200

0

200

400

600

2000 2002 2004 2006 2008 2010 2012 2014 2016

USD, billions

EM ex China

China

Capital Flows to Emerging Markets

Sources: National Authorities; and Haver Analytics

Note: Latest data through 2016Q2 for 29 EMs. Financial Account adjusted for Errors

and Omissions
31

Global Currency Markets

Global currency markets have

experienced periodic bouts of

volatility over the last year, in

part reflecting policy and political

surprises, including the Bank of

Japan’s announcement in January

of negative interest rates on a

portion of bank reserve assets,

and the outcome of the UK vote

on exiting the European Union.   

On a nominal, trade weighted basis, emerging market currencies have followed

different paths in 2016, just as they did in 2015.  Brazil’s currency has appreciated

22 percent year‐to‐date as of end‐September, reflecting renewed investor

confidence in Brazil’s economic prospects.  Mexico’s currency continued to

depreciate and is down nearly 12 percent.  China’s currency, through September,

depreciated 7 percent on a nominal effective basis, while India’s currency is down

2 percent.     

Most of the advanced economy currencies covered in this Report have

appreciated on a nominal trade‐weighted basis; the main exception being the

British pound.  The Canadian dollar has increased 5 percent year‐to‐date as of

end‐September, following a commodity‐related decline in the currency in 2015,

and the Japanese yen has advanced 18 percent over the same period.  The British

pound began depreciating in late‐2015 amid weak economic data and uncertainty

over the UK’s continued membership in the European Union.  As of end‐

September, the pound had

depreciated by over 14 percent in

trade‐weighted terms so far this

year.

Foreign Exchange Reserves

Through the first six months of 2016,

world foreign currency reserves have

increased by about $66 billion, and
32

now total just under $11 trillion

worldwide.  This is in contrast to the

decline in reserves in 2015 of around

$660 billion, as many economies

engaged in the selling of dollar and

other foreign reserve assets to stem

or slow the depreciation of their

currencies.   

Switzerland accounts for a sizable

share of the increase in reserves, but

reserve holdings in Korea, Taiwan,

and India also increased.  A large

reduction in China’s reserves offset these increases.  China held reserves of

roughly $3.2 trillion as of end‐September.   

As noted, China, Korea, Taiwan, and Switzerland do not publish their foreign

exchange intervention activities so it is not possible to separate precisely

transactions from valuation adjustments.5

  These countries each have more than

ample amounts of foreign currency reserves, expressed either as a share of their

short‐term liabilities or as a percent of their GDPs.  

Section 2: Intensified Evaluation of Major Trading Partners

Key Criteria

Pursuant to Section 701 of the Trade Facilitation and Trade Enforcement Act of

2015, this section seeks to identify any major trading partner of the United States

that has: (1) a significant bilateral trade surplus with the United States, (2) a

material current account surplus, and (3) engaged in persistent one‐sided

intervention in the foreign exchange market.  Section 701 requires data on each

major trading partner’s bilateral trade balance with the United States, its current

account balance as a percentage of GDP, the three‐year change in the current

account balance as a percentage of GDP, foreign exchange reserves as a

 

5 In addition, Taiwan does not currently release foreign exchange reserves information according to the IMF’s

Special Data Dissemination Standard (SDDS).  Taiwan is not a member of the IMF but does use SDDS templates for

the release of other macroeconomic and financial data.

FX reserves as % of

short term debt

FX reserves as

% of GDP

India 403.7% 16.1%

China 377.5% 29.1%

Korea 351.0% 26.5%

Taiwan 288.6% 84.5%

Mexico 283.2% 16.5%

Switzerland 68.6% 94.6%

Japan 49.8% 27.9%

Canada 13.3% 4.9%

Italy 5.0% 1.9%

UK 2.1% 4.0%

Germany 2.0% 1.1%

France 1.8% 1.5%

Note: Data as of 2016Q2

Sources: National Authorities, IFS, and Haver Analytics
33

percentage of short‐term debt, and foreign exchange reserves as a percentage of

GDP.  Data for the most recent four‐quarter period July 2015 to June 2016 are

provided in the preceding and following tables.   

Treasury has chosen to focus on the 12 largest trading partners of the United

States, which account for around 70 percent of U.S. trade in goods.  Below the top

12 trading partners, the amounts of trade fall off sharply.  Treasury’s goal is to

focus attention on the currency practices of those economies whose bilateral

trade is the most significant to the U.S. economy, and whose policies are the most

material for the global economy. 6

   

Criterion (1) – Significant bilateral trade surplus with the United States:

Column 1 in Table 1 provides the bilateral goods trade balances for the United

States’ 12 largest trading partners for the four quarters ending June 2016.7

  China

has the largest trade surplus with the United States by far, after which the size of

bilateral trade surpluses declines very quickly.  Treasury assesses that economies

 

6 See Section 3 for a discussion of the factors used to assess the three criteria which, taken together, would require

enhanced analysis. 7 Although this Report does not treat the euro area itself as a major trading partner for the purposes of the 2015

Act – this Report assesses euro area countries individually – data for the euro area are presented in Table 1 and

elsewhere in this Report both for comparative and contextual purposes, and because policies of the ECB, which

holds responsibility for monetary policy for the euro area, will be assessed as the monetary authority of individual

euro area countries.

Balance (% of

GDP, Trailing

4Q)

(2a)

3 Year Change in

Balance (% of

GDP)

(2b)

Balance

(USD, Billion;

Trailing 4Q)

(2c)

Net FX

Purchases

(% of GDP)

(3a)

Net FX

Purchases($

Bil.)

(3b)

Persistent

Net FX

Purchases?

(3c)

China 356.1 2.4 0.0 260.9 ‐5.1% ‐566 No

Germany 71.1 9.1 2.3 312.3 ‐ ‐ No

Japan 67.6 3.7 2.6 158.3 0.0% 0 No

Mexico 62.6 ‐2.9 ‐0.8 ‐31.7 ‐2.2% ‐24 No

Korea 30.2 7.9 2.0 107.1 ‐1.8% ‐24 No

Italy 28.3 2.3 1.9 42.5 ‐ ‐ No

India 24.0 ‐0.8 4.2 ‐16.0 0.3% 5 No

France 18.0 ‐0.5 0.4 ‐12.8 ‐ ‐ No

Taiwan 13.6 14.8 5.2 75.8 2.5% 13 Yes

Switzerland 12.9 10.0 ‐1.6 66.2 9.1% 60 Yes

Canada 11.2 ‐3.4 0.1 ‐51.1 0.0% 0 No

United Kingdom ‐0.3 ‐5.7 ‐2.0 ‐161.2 0.0% 0 No

Memo : Euro Area 130.5 3.2 1.3 380.4 0.0% 0 No

Sources: Haver Analytics; National Authorities; U.S. Bureau of Economic Analysis; and U.S. Department of the Treasury Staff Estimates

Table 1. Major Foreign Trading Partners Evaluation Criteria

Bilateral Goods

Deficit (USD Bil.,

Trailing 4Q)

(1)

Current Account FX Intervention
34

with a bilateral goods surplus of at least $20 billion (roughly 0.1 percent of U.S.

GDP) have a “significant” surplus.  Highlighted in red are the major trading

partners that have a bilateral surplus that meets this threshold over the most

recent four quarters.  In the aggregate, this threshold captures around 75 percent

of the value of all trade surpluses with the United States.   

Criterion (2) – Material current account surplus:

Treasury assesses current account surpluses in excess of 3 percent of GDP to be

“material” for the purposes of enhanced analysis.  Highlighted in red in column 2a

are the five economies that had a current account surplus in excess of 3 percent

of GDP for the four quarters ending June 2016.  Column 2b shows the change in

the current account surplus over the last three years, although this is not a

criterion for enhanced analysis.      

Criterion (3) – Persistent, one‐sided intervention:   

Treasury assesses net purchases of foreign currency, conducted repeatedly,

totaling in excess of 2 percent of an economy’s GDP over a period of 12 months to

be persistent, one‐sided intervention.8

  Column 3a in Table 1 provides Treasury’s

assessment of this criterion.  In economies where foreign exchange interventions

are not published, Treasury uses estimates of net purchases of foreign currency to

proxy for intervention.  Taiwan and Switzerland meet this criterion the last four

quarters available, per Treasury estimates.

Summary of Findings

Pursuant to the 2015 Act,9 Treasury finds that no economy currently meets all

three criteria.  Six major trading partners of the United States, however, have met

two of the three criteria for enhanced analysis in this Report or the previous

Report.  These six economies – China, Japan, Korea, Taiwan, Germany, and

Switzerland – constitute Treasury’s Monitoring List.  China met two of the three

criteria in the April 2016 Report – a large bilateral trade surplus with the United

States and a current account surplus above 3 percent of GDP – and it met one of

 

8 Notably, this quantitative threshold is sufficient to meet the criterion.  Other patterns of intervention, with lesser

amounts and/or less frequent interventions, might also meet the criterion depending on the circumstances of the

intervention.   9 Section 701 of the Trade Facilitation and Trade Enforcement Act of 2015, 19 U.S.C. § 4421.
35

the three criteria in this Report – a large bilateral trade surplus with the United

States.  Japan, Germany, and Korea met two of the three criteria in both Reports,

having material current account surpluses combined with significant bilateral

trade surpluses with the United States.  Taiwan met two of the three criteria in

both Reports, having a material current account surplus and persistent, one‐sided

intervention in foreign exchange markets.  Switzerland met two of the three

criteria in this Report, having a material current account surplus and having

engaged in persistent, one‐sided intervention in foreign exchange markets.  

Treasury will closely monitor and assess the economic trends and foreign

exchange policies of these economies.

The fact that no major trading partner met all three criteria during this period is a

reflection, in part, of the dynamics of the global economy during the past year, in

which capital outflows from emerging markets have led a number of economies

to engage in foreign exchange intervention to resist further depreciation of their

currency (rather than appreciation).  The extent of these flows was unusually high

by historical standards, which underscores the possibility that more economies

may trigger these thresholds going forward.   

Treasury will continue to review the factors it uses to assess whether an economy

has: (1) a significant bilateral trade surplus with the United States, (2) a material

current account surplus, and (3) engaged in persistent one‐sided intervention in

the foreign exchange market, to ensure these reporting and monitoring tools

meet their objective of indicating where unfair currency practices may be

emerging.

Based on the analysis in this Report, Treasury has also concluded that no major

trading partner of the United States met the standard of manipulating the rate of

exchange between its currency and the United States dollar for purposes of

preventing effective balance of payments adjustments or gaining unfair

competitive advantage in international trade during the period covered in the

Report.      
36

Section 3: Assessment Factors for Enhanced Analysis10  

This Section describes the factors Treasury used to assess, under Section 701(a)

(2)(A)(ii) of the Trade Facilitation and Trade Enforcement Act of 2015, whether an

economy that is a major trading partner of the United States has: (1) a significant

bilateral trade surplus with the United States, (2) a material current account

surplus, and (3) engaged in persistent one‐sided intervention in the foreign

exchange market.   

In determining the appropriate factors to assess these criteria, Treasury analyzed

data spanning 15 years across dozens of economies including all economies that

have had a trade surplus with the United States during that period, and a group of

economies that collectively represent 80 percent of global GDP.  The discussion

below presents the findings of this analysis through the first half of 2016.   

This is the second Report to formally implement this framework.  To help prepare

this Report, Treasury has consulted with external analysts regarding the

thresholds described below and their implications.  Going forward, Treasury will

benefit from the formation of an Advisory Committee on International Exchange

Rate Policy, as called for in the 2015 Act, to provide advice to the Secretary of the

Treasury with respect to the impact of international exchange rates and financial

policies on the economy of the United States.  Treasury will continue to review

the factors it uses to assess these criteria to ensure that the new reporting and

monitoring tools provided under the 2015 Act meet their objective of indicating

where unfair currency practices may be emerging.      

A. (a)(2)(A)(ii)(I) a significant  bilateral trade surplus with the  United States

Trade patterns are driven by a host of different factors including production costs,

geographic location, geological endowments, and consumer and producer

demand patterns among many other things.  Accordingly, it is rare for any given

economy to have balanced trade overall, or with its bilateral trading partners.  In

assessing what constitutes a “significant” trade surplus, Treasury analyzed the size

 

10 This Section is submitted pursuant to Section 701(a)(3) of the Trade Facilitation and Trade Enforcement Act of

2015, 19 U.S.C. § 4421.   
37

of bilateral trade surpluses with the United States over the past 15 years.11  The

ordering of economies by the size of their bilateral surpluses with the United

States is relatively stable, and there is a rapid drop off from the largest to smaller

bilateral surpluses.   

The distribution of bilateral trade surpluses points to a significance threshold of

about $20 billion.  This threshold would generally include a group of economies

representing around 75 percent of the value of all trade surpluses with the United

States, and corresponds closely to the top decile of trade surplus countries.  Over

time, as global trade expands, this nominal figure will be reassessed to ensure it

remains current and relevant.     

B. (a)(2)(A)(ii)(II) a material current account surplus

An economy’s current account balance reflects its trade position and its income

on assets abroad, less income it pays on foreign investment within its borders.  

There are several factors that influence an economy’s current account balance,

including its policies, level of development, and structure of the economy.  As

with trade balances, economies rarely have a balanced current account.   

Treasury took an approach in assessing what is a “material” current account

surplus similar to the approach it took in assessing what constitutes a “significant”

bilateral trade surplus.  Based on an examination of global current account

balances since 2000, and taking into account a variety of studies in the economics

literature that examine the impact of current accounts as well as with the work

done by other policy institutions, a surplus of 3 percent of GDP is considered

material.  Looking at 2015 data (the last full year for which data are available on

global current account surpluses), a threshold of 3 percent of GDP captures

economies that account for more than half of total global current account

surpluses.

 

11 Given data limitations, we focus on trade in goods, not including services.  The United States has a surplus in

services trade with many countries in this Report including Canada, China, Japan, Korea, Mexico, and the UK.  

Taking into account services trade would reduce the bilateral trade surplus of these countries with the United

States.   
38

This threshold is broadly consistent with a variety of studies in the economics

literature that examine the impact of current accounts as well as with the work

done by other policy institutions.12   

C. (a)(2)(A)(ii)(III) engaged in persistent one‐sided intervention in the foreign

exchange market:

Governments accumulate reserves for a range of reasons.  Foreign currency

reserves may be needed for day‐to‐day transactions including debt repayments,

payments to international organizations, and payments for imports.  Economies

with pegged exchange rates hold reserves to counter downward pressure on their

currencies.  Economies with flexible exchange rates hold reserves in order to

intervene in foreign exchange markets to prevent a disorderly depreciation of

their currencies.  Reserve holdings also can provide a defense against substantial

and rapid capital outflows that could cause a loss of investor confidence and a

currency crisis.  At the same time, excess reserve accumulation by one or a subset

of economies runs counter to the effective rebalancing of global demand, can

distort the international monetary system and, by bidding up the cost of reserve

assets, also makes it more expensive for vulnerable economies to build up their

own precautionary buffers.   

In defining what constitutes persistent, one‐sided intervention, it is important to

acknowledge that there are only limited precedents in the economics literature or

policy practice.  There is also no single metric by which to assess reserve

accumulation.  Treasury has set a threshold for this criterion of net purchases of

foreign currency, conducted repeatedly, totaling at least 2 percent of an

economy’s GDP over a period of 12 months ending either June or December.  

Notably, this quantitative threshold is sufficient to meet the criterion.  Other

patterns of intervention, with lesser amounts and/or less frequent interventions,

might also meet the criterion depending on the circumstances of the intervention.   

This quantitative threshold captures all of the major periods of foreign exchange

intervention by important emerging markets since 2000.  For example, based on

Treasury estimates, both China and Taiwan would have met this threshold for 12

 

12  External work that bears on this topic includes: (1) BIS working paper #169:  Current Account Adjustment and

Capital Flows, 2005; (2) the IMF’s World Economic Outlook, October 2014, Chapter 4:  Are Global Imbalances at a

Turning Point?; and (3) the EU’s Occasional Paper #92, Scoreboard for the surveillance of macroeconomic

imbalances, 2012.    
39

of the past 15 years, and Korea would have met the threshold for several of those

years.  In assessing the persistence of intervention, Treasury will consider an

economy that is judged to have purchased foreign exchange on net for 8 of the 12

months to have met the threshold, although other patterns of intervention may

also meet the persistence threshold.   

Treasury used publicly available data for intervention on foreign asset purchases

by country authorities, or as estimated by Treasury staff using valuation‐adjusted

foreign exchange reserves.  This methodology requires assumptions about both

the currency and asset composition of reserves in order to isolate returns on

assets held in reserves and currency valuation moves from actual purchases and

sales, including estimations of transactions in foreign exchange derivatives

markets.  Treasury also uses alternative data series when they provide a more

accurate picture of foreign exchange balances, such as China’s monthly reporting

of net foreign assets on the PBOC’s balance sheet and Taiwan’s reporting of net

foreign assets at its central bank.  To the extent the assumptions made are not

reflective of the true composition of reserves, estimates may over or under state

intervention.  Treasury strongly encourages those economies in this Report that

do not currently release data on foreign exchange intervention to do so.
40

Glossary of Key Terms in the Report

Exchange Rate – The price at which one currency can be exchanged for another.  

Also referred to as the bilateral exchange rate.

Exchange Rate Regime –The manner or rules under which an economy manages

the exchange rate of its currency, particularly the extent to which it intervenes in

the foreign exchange market.  Exchange rate regimes range from floating to

pegged.

Floating (Flexible) Exchange Rate – An exchange rate regime under which the

foreign exchange rate of a currency is fully determined by the market with

intervention from the government or central bank being used sparingly.

Foreign Exchange Reserves – Foreign assets held by the central bank that can be

used to finance the balance of payments and for intervention in the exchange

market.  Foreign assets consist of gold, Special Drawing Rights (SDRs), and foreign

currency (most of which is held in short‐term government securities).  The latter

are used for intervention in the foreign exchange markets.

Intervention – The purchase or sale of an economy’s currency in the foreign

exchange market by a government entity (typically a central bank) in order to

influence its exchange rate.  Purchases involve the exchange of an economy’s own

currency for a foreign currency, increasing its foreign currency reserves.  Sales

involve the exchange of an economy’s foreign currency reserves for its own

currency, reducing foreign currency reserves.  Interventions may be sterilized or

unsterilized.

Nominal Effective Exchange Rate (NEER) – A measure of the overall value of an

economy’s relative to a set of other currencies.  The effective exchange rate is an

index calculated as a weighted average of bilateral exchange rates.  The weight

given to each economy’s currency in the index typically reflects the amount of

trade with that economy.   

Pegged (Fixed) Exchange Rate – An exchange rate regime under which an

economy maintains a fixed rate of exchange between its currency and another

currency or a basket of currencies.  Typically the exchange rate is allowed to move

within a narrow predetermined (although not always announced) band.  Pegs are
41

maintained through a variety of measures including capital controls and

intervention.  

Real Effective Exchange Rate (REER) – A weighted average of bilateral exchange 

rates, expressed in price-adjusted terms.   

Trade Weighted Exchange Rate – see Nominal Effective Exchange Rate.