Macroeconomic and 

Foreign Exchange 

Policies of Major 

Trading Partners of the 

United States

REPORT TO CONGRESS

U.S. DEPARTMENT OF THE TREASURY

OFFICE OF INTERNATIONAL AFFAIRS

October 2018
Contents

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

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

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

INTERNATIONAL ECONOMIC TRENDS...............................................................................................................11

ECONOMIC DEVELOPMENTS IN SELECTED MAJOR TRADING PARTNERS......................................................17

SECTION 2: INTENSIFIED EVALUATION OF MAJOR TRADING PARTNERS.......................28

KEY CRITERIA .....................................................................................................................................................28

SUMMARY OF FINDINGS .....................................................................................................................................30

GLOSSARY OF KEY TERMS IN THE REPORT ...............................................................................32

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 (IMF) management and staff in preparing this Report.
1

Executive Summary

Global growth in 2018 has become less even and broad-based than it was amidst the

synchronized upswing last year. The United States remains a bright spot in the global

economy, with growth having accelerated in the second quarter, but there are signals that

economic activity may be slowing in other key regions (the euro area; China) while many

emerging markets have come under pressure from rebounding commodity prices, rising

interest rates, and shifts in sentiment. The Administration’s economic reform efforts –

including tax reform, ongoing regulatory initiatives, and major new trade agreements – are

bearing fruit, as business investment in the United States has accelerated and the outlook

for median income growth is strong. Restoring broad-based growth across the global

economy would be helped by economies putting in place reforms that enhance the

efficiency of tax systems, upgrade regulatory frameworks to better support domestic

investment, and support sound monetary policies.

Real exchange rate movements in 2018 have not generally been in a direction that would

promote more balanced global growth. Most notably, the recent strengthening of the dollar

and the decline in China’s currency would, if sustained, exacerbate persistent trade and

current account imbalances. In March, all G-20 members agreed that strong fundamentals,

sound policies, and a resilient international monetary system are essential to the stability

of exchange rates, contributing to strong and sustainable growth and investment. It is

important that major economies pursue this vision more vigorously. Treasury will also be

monitoring closely the extent to which intervention by our trading partners in foreign

exchange markets is symmetrical, and whether economies that choose to “smooth”

exchange rate movements resist depreciation pressure in the same manner as appreciation

pressure.

The U.S. trade deficit has continued to widen in 2018, partly reflecting robust domestic

demand growth in the United States compared to major trading partners, but also due to

persistent trade and investment barriers in many economies, along with sustained

undervaluation of many currencies per assessments by the International Monetary Fund

(IMF). Bilateral trade deficits with several major trading partners are at very high levels,

particularly with China. Moreover, current account surpluses among several major trading

partners have remained excessive for many years.

The Administration remains deeply concerned by the significant trade imbalances in the

global economy, and is working actively across a broad range of areas to help ensure that

trade expands in a balanced way that protects U.S. firms and workers against unfair foreign

trade practices. The United States is committed to working towards a fairer and more

reciprocal trading relationship with China. 

The United States is also committed to combatting unfair currency practices that facilitate

competitive advantage, including unwarranted intervention in currency markets. Among

major U.S. trading partners, Korea announced this year that it would begin reporting

publicly on foreign exchange intervention in early 2019. We welcome this important

development in Korea’s foreign exchange practices. In addition, in the context of trade
2

negotiations, Mexico, Canada, and the United States have agreed to incorporate

commitments into the U.S.-Mexico-Canada trade agreement to avoid unfair currency

practices and confirm ongoing transparency on related information. We will consider

adding similar concepts to future U.S. trade agreements, as appropriate. 

Treasury also continues to press major trading partners of the United States that have

maintained large and persistent external surpluses to support stronger and more balanced

global growth by facilitating domestic demand growth as the primary engine for economic

expansion. 

Treasury Analysis Under the 1988 and 2015 Legislation

Since 1988, the Treasury Department has been issuing reports to Congress that analyze

international economic policies, including exchange rate policies, of the major trading

partners of the United States. Two pieces of U.S. legislation govern the content of these

reports. 

The Omnibus Trade and Competitiveness Act of 1988 (the “1988 Act”) requires the

Secretary of the Treasury to provide semiannual reports to Congress on international

economic and exchange rate policy. Under Section 3004 of the 1988 Act, the Secretary

must:

“consider whether countries manipulate the rate of exchange between their currency

and the United States dollar for purposes of preventing effective balance of payments

adjustment or gaining unfair competitive advantage in international trade.” 

This determination is subject to a broad range of factors, including not only trade and

current account imbalances and foreign exchange intervention (criteria under the second

piece of legislation discussed below), but also currency developments, exchange rate

practices, foreign exchange reserve coverage, capital controls, and monetary policy.

The Trade Facilitation and Trade Enforcement Act of 2015 (the “2015 Act”) calls for the

Secretary to monitor the macroeconomic and currency policies of major trading partners

and engage in enhanced analysis of those partners if they trigger certain objective criteria

that provide insight into possibly unfair currency practices. 

Treasury has established thresholds for the three criteria as follows: (1) a significant

bilateral trade surplus with the United States is one that is at least $20 billion;2 (2) a

material current account surplus is one that is at least 3 percent of gross domestic product

(GDP); and (3) persistent, one-sided intervention occurs when net purchases of foreign

currency are conducted repeatedly and total at least 2 percent of an economy’s GDP over a

 2 Given data limitations, Treasury focuses in this Report on trade in goods, not including services. The United

States has a surplus in services trade with many economies in this report, including Canada, China, Japan,

Korea, Mexico, Switzerland, and the United Kingdom. Taking into account services trade would reduce the

bilateral trade surplus of these economies with the United States.
3

12-month period.3 In 2017, the $20 billion bilateral trade surplus threshold captured

almost 80 percent of the value of all trade surpluses with the United States, while the 3

percent current account threshold captured more than three-fourths of the nominal value

of global current account surpluses.

China has a long history of pursuing a variety of economic and regulatory policies that lead

to a competitive advantage in international trade, including through facilitating the

undervaluation of the renminbi (RMB). The Treasury Department cited China for

manipulating its currency regularly between 1992 and 1994, noting China’s continued

reliance on foreign exchange restrictions that limited Chinese imports. In January 1994,

China devalued its currency by 33 percent, from 5.82 RMB to the dollar to 8.72. China then

fixed its exchange rate at 8.28 for a decade until 2005, a level that was deeply undervalued. 

Notwithstanding its constructive decision not to further devalue its currency during the

1997-98 Asian Financial Crisis, China’s insistence on maintaining the RMB exchange rate at

a highly undervalued level for such an extended period of time created strong economic

incentives to artificially increase the size of China’s export sector, just as it negotiated its

entry into the World Trade Organization in 2001.

Subsequently, even as its trade and current account surpluses soared, China undertook

protracted, large-scale intervention in the foreign exchange market and allowed the RMB to

strengthen only gradually. Chinese net purchases of foreign exchange averaged almost

nine percent of GDP annually from 2002 to 2009, building excess reserves that eventually

reached about $4 trillion. Importantly, China’s current account surplus expanded from

below 2 percent of GDP in 2001 to a peak of almost 10 percent of GDP in 2007. Since then,

China’s current account surplus has declined substantially, falling to 0.5 percent of GDP in

the four quarters through June 2018. However, it remains unevenly spread among China’s

trading partners. In particular, China retains a very large and persistent trade surplus with

the United States, at $390 billion over the four quarters through June 2018. 

Thus, since the 1988 Act was passed, China’s exchange rate and intervention practices

promoted and sustained a significant undervaluation of the RMB for much of this period,

imposing significant and long-lasting hardship on American workers and companies. 

Over the last decade, the RMB has generally appreciated on a real, trade-weighted basis.

This appreciation has led the IMF to shift its assessment of the RMB in recent years and

conclude that the RMB is broadly in line with economic fundamentals. Notwithstanding

this gradual real trade-weighted appreciation, on a bilateral basis RMB depreciation in the

last few months has brought the RMB back to where it stood against the dollar in nominal

terms almost a decade ago.

 3 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. These quantitative

thresholds for the scale and persistence of intervention are considered sufficient on their own to meet the

criterion. Other patterns of intervention, with lesser amounts or less frequent interventions, might also meet

the criterion depending on the circumstances of the intervention.
4

Moreover, in the last couple of years, China has shifted from a policy of gradual economic

liberalization to one of reinforcing state control and increasing reliance on non-market

mechanisms. The pervasive use of explicit and implicit subsidies and other unfair practices

are increasingly distorting China’s economic relationship with its trading partners. These

actions tend to limit Chinese demand for and market access to imported goods, leading to a

wider trade surplus. China’s policies also inhibit foreign investment, contributing to

weakness in the RMB. 

Of concern, the RMB has fallen notably in recent months. Since mid-June, the RMB has

depreciated to date against the dollar by more than 7 percent. The RMB has also fallen by

nearly 6 percent over the same period versus a broad trade-weighted basket of currencies. 

The majority of depreciation against the dollar occurred between mid-June and midAugust; from mid-August through end-September, the RMB remained within a relatively

narrow range of 6.8-6.9 RMB to the dollar. This depreciation of the RMB will likely

exacerbate China’s large bilateral trade surplus with the United States, as well as its overall

trade surplus. 

While China’s exchange rate practices continue to lack transparency, including its

intervention in foreign exchange markets and its management of daily central parity

settings to influence the value of the RMB, Treasury estimates that direct intervention by

the People’s Bank of China (PBOC) this year has been limited. Since the summer, the

Chinese authorities have reportedly employed limited tools to stem depreciation pressures,

including implementing administrative measures and influencing daily central parity

exchange rate levels. Broader proxies for intervention indicate there have been modest

foreign exchange sales recently by state banks, helping stem depreciation pressures,

though it is clear that China is not resisting depreciation through intervention as it had in

the recent past. 

Treasury Conclusions Related to China

Based on the analysis in this Report, Treasury determines, pursuant to the 2015 Act,

that China continues to warrant placement on the Monitoring List of economies that

merit close attention to their currency practices. Treasury determines that while

China does not meet the standards identified in Section 3004 of the 1988 Act at this

time, Treasury is concerned about the depreciation of the RMB and will carefully

monitor and review this determination over the following 6-month period, including

through ongoing discussions with the PBOC. 

• China continues to run an extremely large and persistent bilateral trade surplus with

the United States, by far the largest among any of the United States’ major trading

partners, with the goods trade surplus standing at $390 billion over the four quarters

through June 2018. As discussed above, recent depreciation of the RMB will likely

exacerbate China’s large bilateral trade surplus with the United States, as well as its

overall trade surplus. Treasury places significant importance on China adhering to its

G-20 commitments to refrain from engaging in competitive devaluation and to not

target China’s exchange rate for competitive purposes. China could pursue more
5

market-based economic reforms that would bolster confidence in the RMB. Treasury

continues to urge China to enhance the transparency of China’s exchange rate and

reserve management operations and goals. Treasury is deeply disappointed that China

continues to refrain from disclosing its foreign exchange intervention. Finally, to

enhance the sustainability of both Chinese and global growth, China needs to

aggressively advance reforms that support greater household consumption growth and

rebalance the economy away from investment.

Treasury Conclusions Related to Other Major Trading Partners

Pursuant to the 2015 Act, Treasury has found in this Report that no major trading

partner met all three criteria during the four quarters ending June 2018. Similarly,

based on the analysis in this Report, Treasury also concludes that no major trading

partner of the United States met the standards identified in Section 3004 of the 1988

Act.

Regarding the 2015 legislation, Treasury has established a Monitoring List of major trading

partners that merit close attention to their currency practices and macroeconomic policies. 

An economy meeting two of the three criteria in the 2015 Act is placed on the Monitoring

List. Once on the Monitoring List, an economy will remain there for at least two

consecutive Reports to help ensure that any improvement in performance versus the

criteria is durable and is not due to temporary factors. As a further measure, this

Administration will add and retain on the Monitoring List any major trading partner that

accounts for a large and disproportionate share of the overall U.S. trade deficit even if that

economy has not met two of the three criteria from the 2015 Act. In this Report, in

addition to China, the Monitoring List comprises Japan, Korea, India, Germany, and

Switzerland. 

With regard to the other five economies on the Monitoring List:

• Japan maintains the third-largest bilateral goods trade surplus with the United States,

with a goods surplus of $70 billion over the four quarters through June 2018. Japan’s

current account surplus over the four quarters through June 2018 was 4.0 percent of

GDP, close to its highest level in a decade. Japan has not intervened in the foreign

exchange market in almost seven years. Treasury’s expectation is that in large, freelytraded exchange markets, intervention should be reserved only for very exceptional

circumstances with appropriate prior consultations. Japan should take advantage of the

current window of steady growth to enact critical structural reforms that can support

sustained faster expansion of domestic activity, create a more sustainable path for longterm growth, and help reduce Japan’s public debt burden and trade imbalances. 

• Korea has for many years maintained an excessively strong external position, though

there has been some moderation in its external imbalances recently. Korea’s goods

trade surplus with the United States continued to narrow to $21 billion over four

quarters through June 2018, contracting over $7 billion from its peak level in 2015. 

Korea’s current account surplus also narrowed slightly over the four quarters through
6

June 2018 to 4.6 percent of GDP. The won appreciated 7 percent against the dollar over

the second half of 2017, but much of this move has reversed in 2018. There was a

notable and concerning pick-up in foreign exchange intervention in November 2017

and January 2018 that appears to have been for the purpose of slowing won

appreciation against the dollar. These purchases were partially reversed through net

foreign exchange sales in the first half of 2018 as the won depreciated against the

dollar. The IMF continues to describe Korea’s current account surplus as larger, and its

exchange rate as weaker, than justified by medium-term economic fundamentals. 

Further, despite real effective appreciation over four quarters through June 2018 of 2

percent, the won is not notably strong compared to levels it has been over the last

couple decades. It is important that the Korean authorities act to strengthen domestic

demand; recent fiscal policy proposals would be a step in the right direction, but Korea

maintains ample policy space to more forcefully support demand growth. Treasury will

continue to monitor closely Korea’s currency practices, including the authorities’

recently announced plans to increase the transparency of exchange rate intervention. 

 

• India’s circumstances have shifted markedly, as the central bank’s net sales of foreign

exchange over the first six months of 2018 led net purchases over the four quarters

through June 2018 to fall to $4 billion, or 0.2 percent of GDP. This represented a

notable change from 2017, when purchases over the first three quarters of the year

pushed net purchases of foreign exchange above 2 percent of GDP. Recent sales have

come amidst a turnaround in foreign portfolio flows, as foreign investors pulled

portfolio capital out of India (and many other emerging markets) over the first half of

the year. The rupee depreciated by around 7 percent against the dollar and by more

than 4 percent on a real effective basis in the first half of 2018. India has a significant

bilateral goods trade surplus with the United States, totaling $23 billion over the four

quarters through June 2018, but India’s current account is in deficit at 1.9 percent of

GDP. As a result, India now only meets one of the three criteria from the 2015 Act. If

this remains the case at the time of its next Report, Treasury would remove India from

the Monitoring List.

• Germany has the world’s largest current account surplus in nominal dollar terms,

$329 billion over the four quarters through June 2018, which represented its highest

nominal level on record. Germany also maintains a sizable bilateral goods trade surplus

with the United States, at $67 billion over the four quarters through June 2018. There

has been essentially no progress in reducing either the massive current account surplus

or the large bilateral trade imbalance with the United States in recent years, in part

because domestic demand in Germany has not been sufficiently strong to facilitate

external rebalancing and because Germany’s low inflation rate has contributed to a

weak real effective exchange rate. As it now stands, these surpluses represent a

substantial excess of income over spending, which translates into weaker imports by

Germany than could be, and thus very large capital outflows. Germany should take

policy steps to unleash domestic investment and consumption – including meaningful

fiscal reforms to minimize burdens from elevated labor and value-added taxes – which

would narrow the gap between domestic income and spending and help reduce large
7

external imbalances. The European Central Bank (ECB) has not intervened unilaterally

in foreign currency markets in over 15 years.4 

• Switzerland’s foreign exchange purchases have declined markedly in both scale and

persistence since mid-2017. This has come as economic conditions have also shifted: 

inflation in Switzerland has turned positive, domestic economic activity has picked up,

and pressures from safe haven inflows have been less persistent. Treasury estimates

that net purchases of foreign exchange over the four quarters through June 2018

totaled $17 billion, equivalent to 2.4 percent of GDP, with purchases occurring less

frequently than in prior years. The Swiss franc appreciated modestly in both nominal

and real effective terms over the first half of 2018; however, the real effective exchange

rate remains less than 6 percent above its 20-year average level. Switzerland had a

very large current account surplus at 10.2 percent of GDP over the four quarters

through June 2018. To help narrow the large and persistent trade and current account

surpluses, Switzerland should adjust macroeconomic policies to more forcefully

support domestic economic activity. Treasury also urges the Swiss authorities to

enhance the transparency of exchange rate intervention.

Treasury continues to track carefully the foreign exchange and macroeconomic policies of

our trading partners under the requirements of both the 1988 and 2015 Acts, and to

review the number of economies covered in this Report. 

 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. 
8

Section 1: Global Economic and External Developments

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

months of 2018 and, where data are available, developments through end-September 2018. 

This Report covers developments in the 12 largest trading partners of the United States, as

well as Switzerland, which is currently the United States’ 15th largest trading partner.5 

These economies’ total goods trade with the United States amounted to $2.9 trillion over

the four quarters through June 2018, over 70 percent of all U.S. goods trade during that

period. 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 for which data are available are

considered (typically up through the second quarter of 2018). 

U.S. Economic Trends

The U.S. economic expansion accelerated markedly in the first half of 2018, growing at an

annual rate of 3.2 percent, compared with 2.6 percent in the second half of last year. 

Growth of private domestic final demand remained strong in the first half of this year,

rising by 3.1 percent, compared with a rate of 3.3 percent in the latter half of 2017, while

net exports picked up, contributing positively to growth. 

The underpinnings of growth have improved thus far in 2018, and include a faster pace of

job creation, strong labor markets with rising labor force participation, multi-year highs in

measures of consumer and small business confidence, solid household finances, and the

strongest outlook for business activity and private investment in many years. Further, the

effects of tax reform appear to be feeding through into the economy, with business fixed

investment growing strongly over the first half of the year. These factors boosted private

domestic demand to a 4.3 percent pace in the second quarter of 2018. Inflation (headline

as well as core, which excludes food and energy) continued to tick up but remained

moderate, and interest rates, including mortgage rates, also moved up. As of early October

2018, a consensus of private forecasters predicted that real GDP would expand at a rate of

3.1 percent in 2018. 

Recent U.S. Growth Performance

Real GDP expanded at an average annual rate of 3.2 percent over the first half of 2018

2017, accelerating noticeably from the 2.6 percent rate in the second half of the year. 

Domestic final demand remained firm, and after reaching its fastest pace in three years in

the final quarter of 2017 (4.4 percent), rebounded to 4.3 percent at an annual rate in the

second quarter of 2018. Consumer spending contributed 1.5 percentage points to GDP

growth in the first half of 2018, less than the 2.1 percentage points added in the latter half

of 2017. Business fixed investment added 1.3 percentage points to growth in the first half

of this year, nearly triple the 0.5 percentage point contribution made in the latter half of

 5 Switzerland is included in this Report as it has previously appeared on Treasury’s Monitoring List since the

October 2016 Report.
9

last year. After making a modest, 0.2 percentage point contribution to growth in the

second half of 2017, residential investment subtracted 0.1 percentage point over the first

half of this year. Net exports added 0.6 percentage point to growth in the first half of 2018,

after posing a drag on growth of 0.4 percentage point in the latter half of 2017. Inventory

accumulation added 0.1 percentage point to growth during last year’s second half, but

subtracted 0.4 percentage point from growth in the first two quarters of this year. 

Government spending boosted growth by 0.1 percentage point in the second half of 2017,

and by 0.3 percentage point in the first half of 2018.

Sound Fundamentals

Payroll employment growth accelerated in 2018, after growing at an already-firm pace

throughout 2017, and as of September 2018 the unemployment rate had declined to a 49-

year low. Nonfarm payroll employment added 208,000 jobs per month, on average, over

the first nine months of 2018, stepping up from the 182,000 average monthly pace in 2017.

In September the unemployment rate declined to 3.7 percent, the lowest rate since 1969. 

Other measures of labor market conditions continue to improve: there are signs of faster

growth in wages, and broader measures of unemployment continue to trend lower.

Measures of consumer mood are at, or very near, multi-year highs according to recent

surveys, with households continuing to express positive views about current and future

economic conditions. Compensation growth continues to firm on a gradual basis: average

hourly earnings for production and nonsupervisory workers rose 2.7 percent over the

twelve months through September 2018, faster than the 2.6 percent, year-earlier pace, and

also stepping up from the rates that prevailed from 2011 through 2015. Total

compensation costs for civilian workers advanced 2.8 percent over the four quarters

ending in June 2018, 0.5 percentage point higher than the year-earlier pace. Moreover, the

debt-service ratio facing households is near historical lows, and household net worth

stands at a record high. 

Business activity and investment have continued to accelerate this year, building on last

year’s solid gains. According to the most recent survey of the Institute for Supply

Management (ISM) in September, the composite index for the manufacturing sector

signaled brisk growth, standing just below the 14-year high reached in August. Fifteen of

18 industries reported expansion, while only three industries reported contraction. The

ISM’s non-manufacturing index also pointed to faster expansion in the services sector in

September, climbing to its highest level in over 20 years. After several weak quarters in

2015 and early 2016, business fixed investment has firmed noticeably over the past

eighteen months, rising by 10.1 percent during the first half of 2018, after growing by 4.1

percent in the latter half of 2017 and by 8.4 percent during last year’s first half. 

Although headline inflation continues to accelerate, it remains moderate by historical

standards. The consumer price index (CPI) for all items rose 2.3 percent over the twelve

months through September 2018, faster than the 2.2 percent rate seen over the year

through September 2017. Growth in the core CPI (which excludes food and energy prices)
10

moved up to 2.2 percent over the year through September 2018, above the 1.7 percent rate

seen over the year through September 2017. 

Fiscal Policy and Public Finances

In December 2017, the United States enacted the first major re-write of the U.S. tax code in

three decades. The new tax code is designed to markedly strengthen incentives for

business investment and to deliver tax relief to middle income households. The new tax

law lowered the U.S. corporate tax rate from one of the highest in the developed world to

near the average of other advanced economies; it allows businesses to immediately deduct

100 percent of the cost of most of their new capital investments for the next five years; and

it delivers relief to working families through lower income tax rates, a larger standard

deduction, and an expanded child tax credit. Combined with regulatory reforms and

infrastructure initiatives, tax reform is expected to encourage people to start new

businesses, draw more workers into the labor market, and support a sustained increase in

productivity. 

The Administration estimates that in FY 2018 the federal government budget deficit was

$779 billion (3.9 percent of GDP), up from $666 billion (3.5 percent of GDP) in FY 2017.

Under the Administration’s budget proposals, the federal deficit over the next five years

(FYs 2019 to 2023) would total $5.1 trillion (4.4 percent of GDP on average). However, the

Administration expects that implementation of its budget proposals – including cuts to

non-defense discretionary spending, elimination of the Affordable Care Act, and reform of

multiple welfare programs – would gradually decrease the deficit to $539 billion (1.6

percent of GDP) by FY 2028. The Administration expects debt held by the public to rise

from an estimated 78 percent of GDP ($15.8 trillion) in FY 2018 to a peak near 83 percent

of GDP in FY 2022, before gradually declining to 75 percent of GDP by FY 2028. 

U.S. Current Account and Trade Balances

The U.S. current account was in deficit by 2.2 percent of GDP in the first half of 2018,

broadly similar to its level in the second half of 2017 and slightly narrower than the 2.4

percent of GDP current account deficit over the same period a year earlier. While the goods

trade deficit has expanded

slightly in nominal terms

(increasing $26 billion in the

first half of 2018 compared

to the same period a year

earlier), it has been

relatively steady as a share

of GDP. The wider goods

deficit has also been partly

offset by a small rise in the

services trade surplus (up

$10 billion year-over-year in

the first half of 2018).

-5

-4

-3

-2

-1

0

1

2

3

H1 2011H2 2011H1 2012H2 2012H1 2013H2 2013H1 2014H2 2014H1 2015H2 2015H1 2016H2 2016H1 2017H2 2017H1 2018

Percent of GDP

U.S. Current Account Balance

Income Services Goods Current Account Balance

Sources: Bureau of Economic Analysis, Haver
11

After narrowing in the postcrisis era to just below 2

percent of GDP in the second

half of 2013, the headline

U.S. current account deficit

has been quite stable since

2015 in the ballpark of 2–21⁄2

percent of GDP. Similarly,

the goods trade balance has

been relatively stable in

recent years, in the range of

4–41⁄2 percent of GDP. But

significant shifts have

occurred within the goods balance. The U.S. petroleum deficit has fallen to its lowest level

in decades and has been steadily below 0.5 percent of GDP since the second half of 2015 as

domestic production has expanded, compressing net petroleum imports. The non-oil

goods deficit, by comparison, has been widening and now stands close to 4 percent of GDP. 

In general over the last few years, the widening non-oil goods deficit reflected strong

import growth and relatively stagnant export growth, likely an effect of the broad

strengthening of the dollar from mid-2014 to early 2017 alongside relatively stronger

domestic demand growth in the United States compared to major trading partners in

recent years. This picture has shifted slightly in 2018, however: while goods imports have

continued to expand, U.S. goods exports have picked up in recent quarters, with non-oil

goods exports more than 7 percent higher year-over-year in the first half of 2018.

At the end of the second quarter of 2018, the U.S. net international investment position

stood at a deficit of $8.6 trillion (42.3 percent of GDP), a deterioration of more than $900

billion compared to end-2017. The value of U.S.-owned foreign assets was $27.1 trillion,

while the value of foreign-owned U.S. assets stood at $35.7 trillion. Recent deterioration in

the net position has been due in part to valuation effects from an appreciating dollar that

lowered the dollar value of U.S. assets held abroad, as well as the relative

underperformance of foreign equity markets compared to U.S. stock markets in 2018.

International Economic Trends

After a synchronized upswing across the global economy in 2017, global growth has

become more uneven and less broad-based over the first half of 2018. Growth in advanced

economies outside the United States has generally disappointed, with output growth across

the euro area, Japan, and the United Kingdom stepping down from its 2017 level. Among

emerging markets, both China and India continue to expand robustly, though in China there

are signals that real activity may be slowing. Many other emerging markets, meanwhile,

have come under pressure as rebounding commodity prices, rising U.S. interest rates, and

shifts in investor sentiment have interacted with preexisting weaknesses and led to bouts

of financial volatility, weighing on growth prospects. According to the IMF’s October 2018

WEO, global growth is expected to be broadly stable at 3.7 percent over 2018 and 2019,

similar its 2017 level. However, the outlook for several key advanced and emerging market

-7

-6

-5

-4

-3

-2

-1

0

2006 2008 2010 2012 2014 2016 2018

Percent of GDP

U.S. Goods Balance

Non-Oil Balance

Oil Balance

Source: Bureau of Economic Analysis
12

economies has been marked

down, and risks are tilted to the

downside as uncertainty and

recent lackluster growth among

several large economies

suppress medium-term

prospects.

Foreign Exchange Markets

The U.S. dollar appreciated 5.6

percent on a nominal effective

basis over the first three

quarters of 2018, retracing most

of its decline over 2017 and

approaching its peak levels in

the post-crisis period. The dollar

has strengthened broadly

against a variety of advanced

economy and emerging market

currencies. Notably, the

Brazilian real, pound sterling,

renminbi, and euro faced sizable

depreciation vis-à-vis the dollar

amidst uncertainty surrounding

the Brazilian economic outlook,

Brexit, U.S.-China trade-related

risks, and flagging European growth signals. Strong U.S. growth and the divergence in

monetary policy of major economies also has played a role in currency movements, as

relatively higher interest rates in the United States have attracted capital flows and put

upward pressure on the dollar. 

Of concern, the dollar is strengthening at a time when the IMF judges that the dollar is

moderately overvalued on a real effective basis. Over the first three quarters of 2018, the

dollar appreciated by 4.7 percent in real effective terms and now stands around 6 percent

above its 20-year average. Continued dollar strength would likely exacerbate persistent

trade and current account imbalances. 

Notwithstanding recent broad dollar strength, a few key currencies have strengthened in

nominal effective and real effective terms due to appreciation relative to their non-U.S.

trading partners. Most notably, the euro has risen on a real effective basis in 2018 in a

manner that helps correct for the undervaluation the IMF assessed for 2017. However,

aside from the euro, real effective exchange rates across the United States’ major trading

partners have generally not moved in a direction that corrects for pre-existing

misalignments.

-10 0 10 20 30

Brazil

India

Mexico

Switzerland

China

Japan

Taiwan

UK

Canada

Euro

Korea

Percent change (relative to end-June 2017)

H2 2017

Q1-Q3 2018

Source: FRB

U.S. Dollar vs. Major Trading Partner Currencies

(+ denotes dollar appreciation)

0

3

6

9

China

India

Korea

Canada

Taiwan

Germany

Mexico

France

United States

UK

Japan

Switzerland

Italy

Brazil

Percent change (annualized rate)

GDP Growth

2017

H1 2018

Note: H1 2018 for China and India based off Q2/Q2 NSA data.

Sources: National Authorities, Haver
13

Treasury judges that foreign exchange markets have continued to function smoothly in

recent months, including as the Federal Reserve raised its interest rate corridor (in March,

June, and September this year) and continued reducing the size of its balance sheet. The

dollar continues to be the world’s principal currency in international foreign exchange

markets, reflecting its dominant global position both in terms of market turnover (being

bought or sold in 88 percent of all currency trades) and trade settlement.6

Global Imbalances

Global current account imbalances remain large. Imbalances narrowed slightly to 1.8

percent of global GDP in 2017, but from a historical perspective, imbalances had not

reached 2 percent of global GDP prior to 2000. Persistent and concentrated imbalances

have characterized the post-crisis landscape, particularly in the surplus economies of Asia

and northern Europe. In part, this has reflected a rotation of surpluses from oil exporting

economies (as global energy prices fell) into oil-importing industrial economies. The

persistence of imbalances has also reflected relative real exchange rates – as noted in the

previous section – with the dollar being relatively strong in historical terms since mid2014. 

 6 Currency market turnover according to the 2016 Bank for International Settlement Triennial Central Bank

Survey of Foreign Exchange and OTC Derivatives.

-20

-10

0

10

20

United States

U.K.

Canada

France

Mexico

India

Brazil

Italy

Euro Area

China

Switzerland

Korea

Japan

Germany

Percent

2017 REER Misalignment (mid)1 2018 REER ∆2

CA Deficit Economies CA Surplus Economies

IMF Estimates of Exchange Rate Misalignment

Undervalued Overvalued

Sources: IMF 2018 External Sector Report, BIS REER Indices, and FRB

1/The IMF's estimate of real effective exchange rate (REER) misalignment (expressed as a range) compares 

the country's average REER in 2017 to the level consistent with the country's medium-term economic 

fundamentals and desired policies. The midpoint of the misalignment range is depicted above.

2/Change through August 2018 versus 2017 average.

Note: The IMF does not provide an estimate of Taiwan's REER misalignment.
14

Over the last three years, the majority of the United States’ major trading partners have

seen current account imbalances widen – as has the United States – though there are some

exceptions. China’s current account surplus has narrowed markedly, though its

merchandise trade surplus remains large and researchers have raised questions about

measurement issues that could cause the reported current account balance to be

understated. Korea’s surplus has also narrowed somewhat from recent peak levels. But

-4

-3

-2

-1

0

1

2

3

4

1980198219841986198819901992199419961998200020022004200620082010201220142016

Percent of Global GDP

Global Current Account Imbalances

China Germany Japan

Other Surplus United States Other Deficit

Statistical Discrepancy

Sources: IMFWEO, Haver

Brazil

Canada

China

France

Germany

India

Italy

Japan

Korea

Mexico

Switzerland

Taiwan

UK

United States

-3

-2

-1

0

1

2

3

4

5

-10 -5 0 5 10 15

3-Year Change in Balance (% of GDP)

Sources: Haver, IMF WEO, National Authorities

Note: Size of bubble is relative to share of global imbalances

2018Q2 Current Account Balance (% of GDP)

Growing CA Surplus Shrinking CA Deficit

Growing CA Deficit Shrinking CA Surplus

Global Current Account Balances - Adjustment 2015Q2-2018Q2

(rolling 4Q sum)
15

several European economies, as well as Japan and Taiwan, have seen external surpluses

grow.

Imbalances have been sustained by the asymmetric composition of growth across key

economies: Asian and European economies, where persistent surpluses are concentrated,

relied heavily on positive contributions from net exports to drive growth between 2010

and 2015. More recently, gross capital formation in several of these economies has been

stagnant with no downward adjustment to national saving, particularly in Germany, Japan,

and Switzerland. Growth in North and Latin America since the crisis, by comparison, has

been led by domestic demand, with the strengthening of U.S. demand being central to the

recent global growth uptick. In order to reduce the risk of a future adjustment in external

balances that weighs on global growth, major economies must put in place a more

symmetric rebalancing process that entails all economies carrying a share of the

adjustment.

Capital Flows

Financial turbulence in key

emerging market economies

in 2018 had broader

spillovers and – coupled with

rising U.S. interest rates that

attracted capital flows into

the United States – led

foreign portfolio flows to

emerging markets (excluding

China) to fall off over the first

half of 2018, with flows

turning negative in the

second quarter. Higher

frequency data (from sources

beyond quarterly balance of

payments data) suggest that economies with relatively weak domestic fundamentals have

experienced the largest and most sustained foreign portfolio outflows, particularly of

portfolio debt. During the first two quarters of 2018, net portfolio flows in emerging

markets (ex-China) totaled -$114 billion (based on data available through mid-October),

declining by about $176 billion relative to the same period in 2017, with several emerging

markets experiencing sustained portfolio outflows. Foreign direct investment to emerging

markets, on the other hand, remained stable and positive in 2018, effectively

counterbalancing net portfolio outflows. Overall, net capital flows to emerging markets

(ex-China) were slightly positive, as in 2017, well below the levels typically witnessed a few

years ago. 

In China, stronger-than-expected domestic growth, tighter capital controls, and a more

balanced renminbi outlook helped stem resident outflows while boosting foreign inflows

during 2017, reversing a two-year trend of sizable net capital outflows. Since end-2017,

-800

-600

-400

-200

0

200

400

600

2000200120022003200420052006200720082009201020112012201320142015

20162017

YTD 2018

USD Billions

Net Capital Flows to Emerging Markets

EM excluding China China

Note: Financial account (excluding reserves) adjusted for errors and ommissions. 

2018 reflects data through the first two quarters where available.

Source: National Authorities, U.S.Department of the Treasury Staff Calculations
16

domestic outflows have remained relatively modest while foreign direct and nonresident

portfolio investment flows continue to pick up. Relative to the same period last year, net

portfolio flows for the first two quarters increased by $91 billion, while net direct

investment increased by $66 billion.

Foreign Exchange Reserves

Global foreign currency reserves

have been broadly stable this

year, with headline reserves

now close to $11.5 trillion, up

$41 billion over the first half of

the year. After valuation

changes pushed up headline

reserve levels in the second half

of 2017, the rise in the dollar in

2018 has weighed on the dollar

value of global reserve stocks,

with some net reserve

accumulation over the first half

of 2018 acting to keep headline

reserves rising slightly. The

increase in global reserves over

the last year continues to

reverse the $1.3 trillion decline in

reserves witnessed between mid2014 and the end of 2016 that was

associated with many economies’

reserve asset sales to stem or slow

local currency depreciation. 

The economies covered in this

Report continue to maintain ample

– or more than ample – foreign

currency reserves compared to

standard adequacy benchmarks. 

Reserves in most economies are

more than sufficient to cover shortterm external liabilities and

anticipated import costs. Excessive

reserve accumulation imposes

costs both on the local economy (in

terms of sterilization costs and

foregone domestic investment) and

the world. Economies should focus

on enhancing resilience through

-100 0 100 200 300 400

World

China

Switzerland

Korea

India

Taiwan

France

Japan

UK

Brazil

Mexico

Italy

Germany

Canada

USD Billions

(Cumulative change)

H2 2017 H1 2018

Note: Includes valuation effects

Sources: InternationalMonetary Fund, Haver

Change in Foreign Currency Reserves

FX Reserves 

(% of GDP)

FX Reserves 

(% of ST debt)

FX Reserves 

(months of 

imports)

Switzerland 107% 68% 24.3

Taiwan 78% 257% 16.9

Korea 24% 324% 7.9

Japan 24% 42% 16.7

China 23% 279% 16.1

Brazil 18% 606% 19.4

India 14% 373% 7.9

Mexico 14% 331% 4.3

UK 4% 2% 1.8

Canada 4% 11% 1.5

Italy 2% 4% 0.8

France 2% 2% 0.7

Germany 1% 2% 0.3

Foreign exchange reserves as of Jun 2018.

Sum of rolling 4Q GDP through Q2-2018.

Sum of rolling 4Q imports of goods and services through Q1-2018.

Sources: National Authorities, World Bank, IMF

Table 1: Foreign Exchange Reserves

Short-term debt consists of gross external debt with original 

maturity of one year or less, as of the end of Q1-2018.
17

stronger policy frameworks, as recommended by the IMF, rather than through continued

reserve accumulation.7

Economic Developments in Selected Major Trading Partners

China

China’s trade surplus with the United States continues to be the largest trade imbalance

across the United States’ major trading partners, with the goods trade surplus growing to a

record level of $390 billion over the four quarters through June 2018. While U.S. goods

exports to China have risen (to $135 billion over the four quarters through June 2018, up

$12 billion from the same period 12 months prior), goods imports have increased more (up

$45 billion year-over-year to $525 billion over the four quarters through June 2018). The

U.S. services trade surplus with China held steady near $20 billion over the first half of

2018, after totaling $40 billion in 2017.

Treasury remains deeply concerned by this excessive trade imbalance which is

exacerbated by persistent non-tariff barriers, widespread non-market mechanisms, the

pervasive use of subsidies, and other unfair practices which increasingly distort China’s

economic relationship with its trading partners. Treasury urges China to create a more

level and reciprocal playing field for American workers and firms, implement

macroeconomic reforms that support greater consumption growth, reduce the role of state

intervention, and allow a greater role for market forces. It is in China’s interest to

implement measures that would reduce the bilateral trade imbalance.

Recent movements in China’s

currency have not been in a

direction that will help reduce

China’s large trade surplus. 

Since mid-June, the RMB has

weakened more than 7 percent

versus the dollar and close to 6

percent against the CFETS

nominal basket. Treasury staff

estimate China’s direct

intervention in the foreign

exchange market to have been

limited this year, including in

recent months when the RMB was depreciating. After accounting for valuation effects,

Treasury staff estimate net foreign exchange intervention by the People’s Bank of China

(PBOC) to be effectively neutral year-to-date. Broader measures that proxy for

intervention suggest that foreign exchange purchases by financial entities beyond PBOC –

 7 International Monetary Fund, 2011, “Assessing Reserve Adequacy,” IMF Policy Paper, February

(Washington: International Monetary Fund).

86

90

94

98

102

106

Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18

Indexed December 2014 = 100

China: Exchange Rates

CFETS Bilateral vs. USD

Sources: CFETS, Bloomberg
18

notably state banks – increased in April and May, totaling close to $45 billion in the second

quarter. Since the summer, authorities have reportedly used a few different tools to stem

depreciation pressures including implementing administrative measures and influencing

daily central parity exchange rate levels, including through reintroduction of a

countercyclical adjustment

factor. Alternatively, Treasury

staff estimate that the PBOC has

refrained from intervention to

counter depreciation pressures. 

The same broader measure that

indicated foreign exchange was

purchased by entities beyond

PBOC in the second quarter

showed that there were foreign

exchange sales of around $10

billion by the same set of entities

in August.

Treasury continues to place considerable importance on China adhering to its G-20

commitments to refrain from engaging in competitive devaluation and to not target China’s

exchange rate for competitive purposes. Treasury also strongly urges China to provide

greater transparency of its exchange rate and reserve management operations and goals.

China’s overall balance of

payments situation has generally

stabilized since the second half

of last year, with foreign

exchange reserves steadying (at

around $3.1 trillion), and

financial and capital outflows

slowing. Recent RMB

depreciation has not been

accompanied by capital outflow

pressures, which have fallen

substantially this year compared

to the period from late 2015 to early 2017. Treasury estimates that, in the first half of this

year, net outflows (excluding flows accounted for by trade and direct investment) totaled

around $10 billion, markedly lower than $160 billion in the first half of 2017 or the $290

billion in the year prior. This moderation in net Chinese resident capital outflows was

aided by relatively tighter capital control measures, in addition to an uptick of inflows into

Chinese financial assets. Nonetheless, the persistent presence of sizeable net errors and

omissions, which have been negative for seventeen consecutive quarters, could suggest

continued undocumented capital outflows. Meanwhile, China’s current account surplus

-150

-100

-50

0

50

Jan-15

Apr-15

Jul-15

Oct-15

Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Billion U.S. Dollars

China: Estimated FX Intervention

Preferred Methodology* Bank FX Settlement

Sources: PBOC, SAFE, U.S. Treasury Estimates

*Based on change in FX-denominated assets on PBOC balance sheet

-5

0

5

10

2008200920102011201220132014201520162017

2018H1

Percent of GDP

China: Current Account Balance

Income Services Goods Current Account Balance

Sources: SAFE,Haver
19

over the four quarters through June 2018 totaled $68 billion, with a large goods surplus

continuing to offset deficits in the services trade and the income balance.8

High-frequency indicators suggest economic activity has decelerated in 2018 as authorities

have pursued the needed deleveraging campaign to address financial stability risks. 

Officially reported real GDP growth fell slightly to 6.7 percent in the second quarter

compared to 6.8 percent in the first quarter on a year-over-year basis, with overall

consumption as the largest contributor. Going forward, structural reforms that durably

open China’s economy to U.S. goods and services, alongside efforts to reduce state

intervention, allow a greater role for market forces, and strengthen household

consumption growth would provide more opportunities for American firms and workers to

compete in Chinese markets and facilitate a more balanced economic relationship between

the United States and China.

Japan

Japan’s current account surplus

remained elevated over the four

quarters through June 2018 at

4.0 percent of GDP, up from a

surplus of 3.8 percent of GDP for

the same period 12 months

prior. The large current account

surplus continues to be driven

primarily by high net foreign

income, which accounted for

over 90 percent of the overall

surplus in the first half of 2018. 

Many past years of surpluses have produced sizable net foreign assets: Japan’s net

international investment position stood at 64 percent of GDP in 2017, the highest in the G7, and the IMF projects it will rise to 77 percent of GDP in the medium term, suggesting

sizable net foreign income flows for years to come. These foreign income flows are

potential spendable income that could be used to bolster demand growth and help reduce

Japan’s sizeable current account surplus.

Japan’s goods trade surplus with the United States over the four quarters through June

2018 was $70 billion, broadly stable relative to the same period 12 months prior. The

United States has a small surplus in services trade with Japan ($12 billion over the four

quarters though June 2018), offsetting a small portion of the large goods trade imbalance. 

 8 There is evidence that China’s deficit in services trade has been overstated by as much as 1 percent of GDP,

with the actual current account balance being higher by a corresponding amount. See Wong, Anna (2017).

"China's Current Account: External Rebalancing or Capital Flight?" International Finance Discussion Papers

1208. Board of Governors of the Federal Reserve System (U.S.).

-3

0

3

6

2008200920102011201220132014201520162017

2018H1

Percent of GDP

Japan: Current Account Balance

Income Services Goods Current Account Balance

Sources: Bank of Japan, Ministry of Finance, Cabinet Office 
20

Treasury remains concerned by the persistence of the large bilateral trade imbalance

between the United States and Japan.

Safe-haven inflows amid

heightened geopolitical tensions

likely played a role in the 6.1

percent appreciation of the yen

versus the dollar from January

through end-March. From endMarch through mid-July the yen

depreciated around 6 percent

against the dollar,

predominantly reflecting broad

dollar appreciation over the

period. As of end-September, it

stood 0.7 weaker against the dollar year-to date. On a real effective basis, the yen has been

relatively stable and remains near the historically weak levels it has hovered around since

the first half of 2013. 

Japan publishes its foreign exchange intervention. Japan has not intervened in foreign

exchange markets since 2011.

After weak growth in Q4 2017 and Q1 2018, growth rebounded in Q2 2018 to 3.0 percent

annualized. Private final consumption and domestic fixed capital formation remain

volatile, while the growth impulse from net exports has declined relative to 2016 and 2017. 

After peaking at 1.5 percent year-on-year in February, CPI inflation has moderated

somewhat, and stood at 1.3 percent year-on-year as of August. The Bank of Japan (BOJ) has

maintained a policy of “Quantitative and Qualitative Easing with Yield Curve Control” since

September 2016. The BOJ maintains the overnight policy rate at negative 10 basis points

and purchases Japanese Government Bonds so that the 10-year yield remains “around”

zero percent. In its July Monetary Policy meeting, the BOJ announced that it would increase

the flexibility of its asset purchase program, reduce the size of account balances subject to

negative interest rates, and allow more movement in the 10-year yield around its zero

percent target. It also provided forward guidance that “the Bank intends to maintain the

current extremely low levels of short- and long-term rates for an extended period of time”

citing the need to monitor economic developments, including the impact of the increase in

the consumption tax slated for 2019. Following this announcement, the BOJ purchased

$3.6 billion in 5- to 10-year Japanese government bonds to stem a selloff that saw the 10-

year yield touch an 18-month high of 0.15 percent.

Looking forward it will be important that the Japanese authorities continue with their

structural reform agenda to entrench stronger growth, while ensuring the sustainability of

public finances. In the context of the proposed consumption tax hike slated for fall of 2019,

the authorities should ensure the contemplated offsets will be sufficient in both magnitude

and design to sustain economic growth. 

60

80

100

120

140

60

80

100

120

140

Jan-07Jan-08

Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18

Indexed to 20Y Avg = 100

Japan: Exchange Rates

REER NEER Bilateral vs. USD

Sources: Bank of Japan, Bank for International Settlements
21

Korea

After peaking at close to 8

percent of GDP in 2015, Korea’s

current account surplus has

been gradually narrowing,

reaching 4.2 percent of GDP in

the first half of 2018. The

decline in the current account

has been largely due to a

widening of Korea’s services

trade deficit. Korea’s overall

goods trade surplus has also

moderated somewhat, though it

remains high at around 7 percent of GDP. The IMF in its most recent analysis continued to

describe Korea’s current account surplus as moderately stronger than justified by

economic fundamentals. 

Korea’s goods trade surplus with the United States stood at $21 billion over the four

quarters through June 2018, down from a peak of $28 billion in 2015. The United States

has a surplus in services trade with Korea, at $14 billion over the four quarters through

June 2018. 

Korea does not yet publish its

foreign exchange market

intervention. Korean authorities

announced earlier this year that

they would begin disclosing

intervention data in early 2019. 

Treasury estimates that between

July 2017 and June 2018 Korean

authorities made net purchases

of foreign exchange of $4.1

billion (0.3 percent of GDP),

including activity in the forward

market. Net purchases were concentrated in November 2017 and January 2018 (around

$9 billion), a period when the won was appreciating both against the dollar and on a real

effective basis. Appreciation against the dollar reversed in January, and the won has

depreciated roughly 6 percent to date in 2018 against the dollar, while appreciating by 0.2

percent on a real effective basis as of August. Net intervention since January, meanwhile,

has been relatively modest, with a decline in the Bank of Korea’s net forward position

largely offset by estimated spot market purchases.

The IMF has considered the Korean won to be undervalued every year since 2010, and in

its most recent evaluation considered the won to be undervalued by 2-7 percent. Korea

has well-developed institutions and markets and should limit currency intervention to only

-5

0

5

10

2008200920102011201220132014201520162017

2018H1

Percent of GDP

Korea: Current Account Balance

Income Services Goods Current Account Balance

Sources: Bank of Korea, Haver

-10

-5

0

5

10

Jan-16

Apr-16

Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

Apr-18

Jul-18

Billion U.S. Dollars

Korea: Estimated FX Intervention

Est. Spot Market Intervention Change in Net Forward Book

Sources:Bank of Korea, U.S. Treasury estimates
22

truly exceptional circumstances

of disorderly market conditions. 

Korea maintains ample reserves

at $390 billion as of June 2018,

equal to more than three times

gross short-term external debt

and 24 percent of GDP. 

Treasury will be closely

monitoring authorities’ plans to

begin reporting foreign

exchange intervention in a more

transparent and timely manner.

Though Korea’s external position has adjusted somewhat since the peak of the current

account surplus in 2015, there remains scope for policy reforms that would support a more

durable strengthening of domestic demand. Korea was strongly reliant on external

demand in the first few years after the global financial crisis, with net exports accounting

for more than one-third of cumulative growth over 2011-2014. Domestic demand growth

has generally been stronger since 2015, averaging above 4 percent annually, though it

stepped down in the first half of 2018 and the outlook for domestic demand growth going

forward is also clouded by elevated household debt. 

In order to decisively rebalance the economy and further reduce the still-large trade and

current account surpluses, Korea will need to have a sustained period in which domestic

growth exceeds overall GDP growth. Korea maintains sufficient policy space to support

domestic demand, particularly as public sector debt remains relatively low at around 40

percent of GDP. Recent policy proposals appear to be a step in the right direction: the

Korean authorities’ 2019 budget calls for a 9.7 percent increase in fiscal spending next

year, which would be the highest increase in a decade. Proposed expenditures would

enhance the social safety net through subsidies for hiring young and elderly workers and

initiatives to increase female employment and childcare. The impact of these measures

could be enhanced by extending their duration and better targeting them at those living

below the poverty line, while pairing them with more comprehensive labor market reforms

that reduce restrictions on laying off regular workers and incentivize hiring non-regular

workers. Structural fiscal reforms to support household consumption could also be

particularly helpful to raise domestic demand and avoid reliance on net exports to drive

growth going forward.

India

India’s current account deficit widened in the four quarters through June 2018 to 1.9

percent of GDP, following several years of narrowing from its 2012 peak. The current

account deficit has been driven by a large and persistent goods trade deficit, which has in

turn resulted from substantial gold and petroleum imports. The goods trade deficit has

widened out in the first half to 6.4 percent of GDP as oil prices have risen. The IMF projects

70

80

90

100

110

120

130

70

80

90

100

110

120

130

Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18

Indexed to 20Y Avg = 100

Korea: Exchange Rates

Bilateral vs. USD REER NEER

Sources: Bank of Korea, Bank for International Settlements
23

the current account deficit to be

around 2.5 percent of GDP over

the medium term as domestic

demand strengthens further and

favorable growth prospects

support investment. 

India’s goods trade surplus with

the United States was $23 billion

for the four quarters through

June 2018. India also had a

small surplus in services trade

with the United States of $4

billion over the same period. India’s exports to the United States are concentrated in

sectors that reflect India’s global specialization (notably pharmaceuticals and IT services),

while U.S. exports to India are dominated by key service trade categories, particularly

travel and higher education.

India has been exemplary in publishing its foreign exchange market intervention. The

Reserve Bank of India (RBI) has noted that the value of the rupee is broadly marketdetermined, with intervention used only during “episodes of undue volatility.” According

to the authorities’ data, India was generally a net purchaser of foreign exchange from late

2013 to the middle of 2017, as the RBI sought to gradually build a stronger external buffer

in the aftermath of the May 2013 “taper tantrum.” Purchases accelerated in the first half of

2017 amidst strong portfolio inflows to India (and many other emerging markets); as a

result, cumulative net purchases of foreign exchange exceeded 2 percent of GDP over 2017.

Foreign exchange purchases

generally declined in the second

half of 2017, and the RBI shifted

to selling foreign exchange in the

first half of 2018. Net purchases

of foreign exchange over the

past four quarters through June

totaled $4 billion (0.2 percent of

GDP), including activity in the

forward market. Sales of foreign

exchange in the first half of this

year came in the context of

foreign portfolio outflows of $7 billion, as India experienced outflows (particularly of

foreign portfolio debt) that were witnessed across many emerging markets in the second

quarter. This mirrored the pattern of the last few years, in which intervention has typically

tracked institutional portfolio flows. India maintains ample reserves according to IMF

metrics for reserve adequacy, particularly given that India maintains some controls on both

inbound and outbound flows of private capital. As of June 2018, foreign currency reserves

-15

-10

-5

0

5

10

2008

200920102011201220132014201520162017

2018H1

Percent of GDP

India: Current Account Balance

Income Services Goods Current Account Balance

Sources: Reserve Bank of India

-15

-10

-5

0

5

10

15

Jan-2016

Apr-2016

Jul-2016

Oct-2016

Jan-2017

Apr-2017

Jul-2017

Oct-2017

Jan-2018

Apr-2018

Jul-2018

Billion U.S. Dollars

India: FX Intervention

Net Spot Market Intervention Change in Net Forward Book

Source:Reserve Bank of India
24

stood at $380 billion, equal to

3.7 times gross short-term

external debt, 8 months of

import cover, and 14 percent of

GDP.9

The rupee depreciated 7 percent

against the dollar in the first half

of the year, while the real

effective exchange rate also

reversed its general uptrend

from the last few years,

depreciating by 4 percent. In its

most recent analysis, the IMF assessed the real effective exchange rate to be in line with

economic fundamentals. The RBI’s most recent annual report assessed the rupee to be

“closely aligned to its fair value over the long term.”

The Euro Area and Germany

Euro area GDP growth moderated this year after posting its strongest overall performance

in a decade in 2017, but the economy continues to exhibit broad-based output growth

across both countries and sectors. While the aggregate euro area output gap has been

narrowing, the cyclical positions of individual member economies within the currency

union remain divergent due to the legacies of the euro area crisis. Further, trend growth

also varies widely across member countries, due in part to structural differences that affect

competitiveness. These dynamics have weighed on the value of the euro, making the euro’s

exchange rate appear undervalued for some of the strongest-performing individual

member countries in the currency union (e.g., Germany).

The euro depreciated by 3.5 percent against the dollar year-to-date through the end of

August, but it has strengthened in 2018 on both a nominal effective and real effective basis,

by 3.5 percent and 2.6 percent, respectively. Recent movements leave the euro still on the

weaker side of longer-term trends: The euro is about 1 percent below its 20-year average

in real effective terms and around 4 percent weaker on a nominal bilateral basis against the

dollar versus its 20-year average. The weakness of the euro is a multi-year phenomenon,

spurred initially by concerns about the resilience of the monetary union in the midst of the

regional crisis and sustained more recently by monetary policy. The ECB’s quantitative

easing and negative interest rate policy opened a sizable gap in bond market yields

between the euro area and other advanced economies, which has contributed to the euro’s

weakness versus its historical level in recent years. The euro area’s improved economic

performance helped support the common currency in 2017, but downside growth

surprises and political uncertainty have weighed on the currency in recent months.

 9 Gross short-term external debt reflects external debt with remaining maturity of one year or less, as

reported by the Joint External Debt Hub.

70

80

90

100

110

120

130

70

80

90

100

110

120

130

Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18

Indexed to 20Y Avg = 100

India: Exchange Rates

Bilateral vs. USD REER NEER

Sources: ReserveBank of India, Bank for International Settlements
25

The ECB publishes its foreign exchange intervention, and has not intervened unilaterally in

over 15 years.

Germany’s current account surplus has been the largest in the world in nominal terms

since 2016, standing at $329 billion over the four quarters through June 2018 (equivalent

to 8.2 percent of GDP). German economic policies supporting high domestic saving and low

consumption and investment have pushed up Germany’s current account surplus, with

lower oil prices also supporting the external position since 2014. Over the long run, there

has been a meaningful divergence between German domestic inflation and wage growth

and (faster) average euro area inflation and wage growth. This has contributed to a

general rise in Germany’s competitiveness vis-à-vis its euro area neighbors. However,

given the wide dispersion of economic performance across the euro area, the euro’s

nominal exchange rate has not tracked this rise in German competitiveness. Consistent

with this, the IMF estimates that Germany’s external position remains substantially

stronger than implied by economic fundamentals, and Germany’s real effective exchange

rate undervalued by 10-20 percent. Further, with other euro area member countries

implementing reforms to rebalance their economies and reduce external deficits, the

strength of Germany’s external position is impacting the external balance of the euro area

overall: The IMF for the first time this year assessed the euro area as a whole to have an

external position moderately stronger than the level implied by economic fundamentals.

A number of German economic policies have restrained domestic consumption and

investment, including elevated labor and value-added taxes and strict fiscal rules. Growth

was strongly supported by net exports for several years following the crisis, which led to a

substantial widening of the current account surplus. Since 2015, growth has been more

balanced, with German domestic demand largely accounting for growth over the last three

years. This has helped stall the growth in the current account surplus, but it has not been

sufficient to appreciably reduce external imbalances. Demand growth needs to accelerate

substantially for a sustained period for external rebalancing to proceed at a reasonable

pace, which would be supported by growth-friendly tax and other policy reforms. 

Germany’s bilateral trade surplus with the United States is excessive and a matter of

significant concern. Treasury recognizes that Germany does not exercise its own monetary

policy and that the German economy continues to experience strong gains in employment. 

Nevertheless, Germany has a responsibility as the fourth-largest economy globally and as

an economy with a very large external surplus to contribute to more balanced demand

growth and to more balanced trade flows. Allowing an increase in domestic demand

against relatively inelastic supply should help push up wages, domestic consumption,

relative prices against many other euro area members, and demand for imports; and higher

relative prices would help appreciate Germany’s undervalued real effective exchange rate. 

This would contribute to both global and euro area rebalancing.

Switzerland

Prior to 2017, Switzerland had for several years received safe haven capital inflows amidst

deflationary price pressures and muted domestic economic activity. In this context, foreign
26

exchange intervention had been

used – alongside negative

interest rates – to contain

appreciation pressures and

combat deflation. Since mid2017, the picture has shifted

markedly: inflation in

Switzerland has turned positive,

domestic economic activity has

accelerated, and pressures from

safe haven inflows have been

less persistent. In line with

these developments, foreign

exchange intervention has declined notably, in both scale and frequency. The Swiss

National Bank (SNB) does not report foreign exchange intervention outside of a yearly total

in its annual report. Based on sight deposit data, Treasury estimates that net purchases of

foreign exchange over the four quarters through June 2018 were relatively limited, though

possibly slightly in excess of 2 percent of GDP. Moreover, foreign exchange purchases are

estimated to have been less frequent, particularly in 2018, compared to previous years.

Switzerland’s current account

surplus remains elevated. The

current account surplus in the

first half of 2018 was 11.5

percent of GDP, up from 10.0

percent of GDP in the first half of

2017. The United States’ goods

trade deficit with Switzerland

was $17 billion over the four

quarters through June 2018, up

from $13 billion compared to the

same period a year earlier.

The Swiss franc has appreciated year-to-date through the end of August, by 0.4 percent

against the dollar and 3.1 percent against the euro. Reflecting the euro’s greater

importance for Switzerland’s trade-weighted exchange rate, both the nominal and real

effective exchange rate (NEER and REER) appreciated over the same time period, by 3.9

percent and 3.4 percent, respectively, unwinding a portion of the decline over the latter

half of 2017. The depreciation of the franc over the second half of 2017 had led the SNB to

shift its assessment of the franc to “highly valued” – a characterization that maintained

through the first half of 2018. As of August 2018, the REER stood 5.5 percent above its 20-

year average.

 

As a result of interventions and valuation changes, foreign reserves had grown to $772

billion by the end of the first quarter 2018 (from $762 billion at end-2017) but declined

during the second quarter to $753 billion. This can be partly explained by a 4.1 percent

0

10

20

30

40

50

60

70

Q1-2015Q2-2015Q3-2015Q4-2015Q1-2016Q2-2016Q3-2016Q4-2016Q1-2017Q2-2017Q3-2017Q4-2017Q1-2018

Q2-2018

Billion U.S. Dollars

Sources: SNB, Haver, U.S. Treasury estimates based on sight deposits 

Switzerland: Estimated FX Intervention

-10

-5

0

5

10

15

2008200920102011201220132014

2015

20162017

2018H1

Percent of GDP

Switzerland: Current Account Balance

Income Services Goods Current Account Balance

Sources: SwissNational Bank, Haver
27

appreciation of the dollar against the Swiss franc during the second quarter. With inflation

now positive and safe haven pressures less persistent, the current window offers an

opportunity to consider how to unwind this large stock of foreign assets on the central

bank’s balance sheet. Further, given that external surpluses remain very large and the

acceleration in activity relatively nascent, Switzerland should adjust macroeconomic

policies to more forcefully support domestic economic activity. For example, Switzerland

appears to have ample fiscal space – with the budget broadly balanced and public debt

around 40 percent of GDP – and could pursue tax or other structural reforms aimed at

durably raising investment and productivity. Treasury continues to encourage the Swiss

authorities to transparently publish all intervention data on a higher frequency basis.
28

Section 2: Intensified Evaluation of Major Trading Partners

The Trade Facilitation and Trade Enforcement Act of 2015 (the “2015 Act”) requires the

Secretary of the Treasury to provide semiannual reports on the macroeconomic and

foreign exchange rate policies of the major trading partners of the United States. Section

701 of 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.” Additionally, the 2015 Act establishes a process to engage economies that may be

pursuing unfair practices and impose penalties on economies that fail to adopt appropriate

policies.

Key Criteria

Pursuant to Section 701 of the Trade Facilitation and Trade Enforcement Act of 2015, this

section of the Report 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 percentage of short-term debt, and foreign exchange reserves as a percentage

of GDP. Data for the most recent four-quarter period (July 2017 to June 2018, unless

otherwise noted) are provided in Table 1 (on p. 16) and Table 2 (below). 

As noted earlier, Treasury’s focus is on the 12 largest trading partners of the United States;

these economies account for more than 70 percent of U.S. trade in goods. Additionally, this

Report covers Switzerland, which is currently the United States’ 15th largest trading

partner, but has previously been among the 12 largest trading partners and has appeared

on Treasury’s Monitoring List. Treasury’s goal is to focus attention on those economies

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

most material for the global economy. 

The results of Treasury’s latest assessment pursuant to Section 701 of the 2015 Act are

discussed below.
29

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

Column 1 in Table 2 provides the

bilateral goods trade balances for

the United States’ 12 largest

trading partners and Switzerland

for the four quarters ending June

2018.10 China has the largest

trade surplus with the United

States by far, after which the sizes

of the bilateral trade surpluses

decline notably. Treasury

assesses that economies 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 in

column 1 are the seven major

trading partners that have a

bilateral surplus that meets this threshold over the most recent four quarters. Table 3

provides additional contextual information where available on bilateral services trade with

these trading partners. 

 10 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 2 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.

Goods Surplus with 

United States (USD 

Bil., Trailing 4Q) 

(1)

Balance

(% of GDP, 

Trailing 4Q)

(2a)

3 Year Change 

in Balance

(% of GDP) 

(2b)

Balance

(USD Bil., 

Trailing 4Q)

(2c)

Net Purchases

(% of GDP, 

Trailing 4Q)

(3a)

Net Purchases

(USD Bil., 

Trailing 4Q)

(3b)

Net Purchases

(USD Bil., 

Trailing 2Q)

(3c)

Net Purchases

8 of 12 

Months†

(3d)

China 390 0.5 -2.3 68 0.0 1 6 Yes

Mexico 73 -1.6 0.3 -20 0.0 0 0 No

Japan 70 4.0 1.8 198 0.0 0 0 No

Germany 67 8.2 0.0 329 .. .. .. ..

Italy 32 2.8 1.0 57 .. .. .. ..

India 23 -1.9 -0.6 -50 0.2 4 -23 No

Korea 21 4.6 -2.3 73 0.3 4 -1 No

Taiwan 17 14.3 1.4 85 1.2 7 2 Yes

Switzerland 17 10.2 0.0 72 2.4 17 8 No

France 16 -0.6 -0.2 -16 .. .. .. ..

Canada 15 -3.1 0.0 -53 .. .. .. ..

United Kingdom -7 -3.5 1.5 -98 .. .. .. ..

Brazil -9 -0.7 3.5 -14 -2.0 -41 -39 No

Memo : Euro Area 143 3.6 0.7 486 0.0 0 0 No

Table 2. Major Foreign Trading Partners Evaluation Criteria

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

Bilateral Trade Current Account Foreign Exchange Intervention

†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.

Goods Surplus with 

United States (USD 

Bil., Trailing 4Q) 

(1a)

Goods Trade 

(USD Bil., 

Trailing 4Q) 

(1b)

Services Surplus with 

United States (USD 

Bil., Trailing 4Q)* 

(1c)

Services Trade 

(USD Bil., 

Trailing 4Q)* 

(1d)

China 390 660 -41 78

Mexico 73 584 -8 60

Japan 70 211 -12 80

Germany 67 180 1 69

Italy 32 74 3 23

India 23 81 4 54

Korea 21 122 -14 36

Taiwan 17 70 -1 18

Switzerland 17 61 n.a. n.a.

France 16 87 -2 38

Canada 15 604 -27 95

United Kingdom -7 119 -13 131

Brazil -9 69 -21 35

Memo : Euro Area 143 589 n.a. n.a.

Source: U.S. Census Bureau, Bureau of Economic Analysis

Bilateral Trade

Table 3. Major Foreign Trading Partners - Expanded Trade Data

*Services data is through Q2 2018. Services data is reported on a balance of payments basis (not 

seasonally adjusted), while goods data is reported on a census basis (not seasonablly adjusted). 

Bilateral services trade data through Q2 2018 is not yet available for some trading partners.
30

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 of Table 2 are the

five economies that had a current account surplus in excess of 3 percent of GDP for the four

quarters ending June 2018. In the aggregate, these five economies accounted for more than

half of the value of global current account surpluses as of the end of 2017. Column 2b

shows the change in the current account surplus as a share of GDP 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, onesided intervention.11 Columns 3a and 3d in Table 2 provide Treasury’s assessment of this

criterion.12 In economies where foreign exchange interventions are not published,

Treasury uses estimates of net purchases of foreign currency to proxy for intervention. No

economy meets this criterion for the four quarters ending June 2018, per Treasury

estimates.13

Summary of Findings

Pursuant to the 2015 Act,14 Treasury finds that no major trading partner of the United

States met all three criteria in the current reporting period. Five major trading partners of

the United States, however, met two of the three criteria for enhanced analysis in this

Report or in the April 2018 Report. Additionally, one major trading partner, China,

constitutes a disproportionate share of the overall U.S. trade deficit. These six economies

– China, Japan, Korea, India, Germany, and Switzerland – constitute Treasury’s

Monitoring List. Japan, Germany, and Korea have met two of the three criteria in every

Report since the April 2016 Report (the initial Report based on the 2015 Act), having

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

lesser amounts or less frequent interventions, might also meet the criterion depending on the circumstances

of the intervention.

12 Treasury uses publicly available data for intervention on foreign asset purchases by authorities, or

estimated intervention based on 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 do not reflect the true composition of reserves, estimates may overstate or

understate intervention. Treasury strongly encourages those economies in this Report that do not currently

release data on foreign exchange intervention to do so. 13 While Switzerland’s net purchases of foreign exchange are estimated at above 2 percent of GDP, there has

been a notable decline in the frequency and persistence of intervention.

14 Section 701 of the Trade Facilitation and Trade Enforcement Act of 2015, 19 U.S.C. § 4421.
31

material current account surpluses combined with significant bilateral trade surpluses

with the United States. Switzerland met two of the three criteria in every Report between

October 2016 and April 2018 – having a material current account surplus and having

engaged in persistent, one-sided intervention in foreign exchange markets – and it met one

of the three criteria in this Report, a material current account surplus. India met two of the

three criteria in the April 2018 Report – having a significant bilateral surplus with the

United States and having engaged in persistent, one-sided intervention in foreign exchange

markets – and it met one of the three criteria in this Report, a significant bilateral surplus

with the United States. In both Switzerland and India, there has been a notable decline

recently in the scale and frequency of foreign exchange purchases. Both Switzerland and

India must demonstrate that this improvement against the intervention criteria is durable

before they will be removed from the Monitoring List. China has met one of the three

criteria in every Report since the October 2016 Report, having a significant bilateral trade

surplus with the United States, with this surplus accounting for a disproportionate share of

the overall U.S. trade deficit. Treasury will closely monitor and assess the economic

trends and foreign exchange policies of each of these economies.

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

trading partner of the United States met the standard in the 1988 Act 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. 

Notwithstanding these findings, Treasury remains deeply concerned by the significant

trade imbalances in the global economy. Real exchange rate movements in 2018 –

particularly the strengthening of the dollar and the decline in China’s currency – would, if

sustained, exacerbate persistent trade and current account imbalances. China’s economic

model, which continues to rely significantly on non-market mechanisms, is posing growing

risks to the long-term global growth outlook. The United States is committed to working

towards a fairer and more reciprocal trading relationship with China. To this end, we are

engaging China to address its market-distorting policies and practices. Treasury also

continues to press major trading partners of the United States that have maintained large

and persistent external surpluses to support stronger and more balanced global growth by

facilitating domestic demand growth as the primary engine for economic expansion. 
32

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 currency 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 set rate of exchange between its currency and another currency or a basket of

currencies. Often the exchange rate is allowed to move within a narrow predetermined

(although not always announced) band. Pegs are 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. Unlike the nominal effective exchange rate, it is further

adjusted for the effects of inflation in the countries concerned. 

Trade Weighted Exchange Rate – see Nominal Effective Exchange Rate.