Report to Congress on International Economic and Exchange Rate 

Policies

For the period July 1, 2002, through December 31, 2002

Major Findings:

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

rates with no intervention to currency unions and to full dollarization.

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

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

promote economic growth and economic stability.

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

3004 of the Act during the period July 1, 2002, through December 31, 2002.

The United States:

Current Account

The U.S. current account deficit rose to a seasonally 

adjusted (sa) $137 billion or 5.2% of GDP in the fourth 

quarter of 2002. The current account deficit for the 

entire year rose to $503 billion or 4.8% of GDP in 

2002 from a cyclically depressed level of $393 billion, 

or 3.9% of GDP, in 2001. The value of imports, 

particularly of consumer goods and petroleum and 

petroleum products, increased strongly in the period1

from the first half of 2002. Export growth was

sluggish as the recovery in foreign economies lagged 

the United States recovery.

Financial Flows

Net financial flows into the United States remained 

strong. Although net foreign purchases of U.S.

corporate bonds and equities declined during the period 

from first half 2002 levels, increased net sales of

Treasury and agency securities were large enough to 

offset these declines. The inflows easily financed the 

U.S. current account deficit and reflected international 

investors’ continued strong interest in investment 

opportunities in U.S. markets.

International Investment Position and Earnings

The latest available data indicate that the negative net 

investment position of the United States (with direct 

investment valued on a market-value basis) widened to 

$2.3 trillion at the end of 2001 from $1.6 trillion at the 

end of 2000. Despite this large negative position, net 

income payments on investment assets amounted to 

only $5 billion dollars in 2002. This represents a

decline from a positive $21 billion in net earnings on 

investment assets in 2001, reflecting a fall in net

income on direct investment from $103 billion in 2001 

to $78 billion in 2002. 

 

1

“The period” means July 1, 2002, through December 31, 

2002 unless otherwise indicated

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

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

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

2001 2002

Q1 Q2 Q3 Q4

Balance on Currenct Account

 Billions of $ -393.4 -503.4 -112.5 -127.7 -126.3 -136.9

 Per Cent GDP -3.9 -4.8 -4.4 -4.9 -4.8 -5.2

Select Financial Flows

 (+=capital inflow)

 Net Bank Flows -48.3 110.4 -9.3 -11.9 68.0 63.6

 Net Direct Investment Flows 3.0 -93.4 -13.2 -37.1 -23.5 -19.6

 Net Securities Sales 342.7 417.6 73.3 112.3 131.0 101.0

 Net Liabilities to Unaffiliated Foreigners 

 by Non Banking Concerns 68.0 21.2 32.4 4.4 -8.0 -7.5

Memo: Statistical discrepancy 10.7 28.5 24.9 54.4 -43.4 -7.4

Trade in Goods

Balance -427.2 -484.4 -106.6 -122.6 -122.9 -132.3

Total Exports 718.8 682.6 164.4 172.2 175.4 170.7

 of which:

 Agricultural Products 54.9 54.4 13.8 13.5 13.3 13.8

 Capital Goods Ex Autos 321.7 290.6 70.9 73.3 75.3 71.1

 Automotive Products 75.4 78.4 18.4 20.1 20.6 19.3

 Consumer Goods 88.3 84.4 20.5 21.0 21.5 21.4

 Industrial Supplies * 160.2 157.0 36.8 39.7 39.9 40.5

Total Imports 1145.9 1166.9 271.0 294.8 298.2 302.9

 of which

 Petroleum and Products 103.6 103.6 19.2 27.1 27.7 29.6

 Capital Goods ex Autos 298.0 283.9 69.3 72.1 71.3 71.2

 Automotive Products 189.8 203.9 47.6 51.8 52.5 52.0

 Consumer Goods 284.5 307.9 71.4 76.9 78.8 80.7

Advanced Technology (NSA)

Balance 4.4 -17.5 -2.0 -2.1 -5.5 -8.0

Exports 199.6 178.6 43.6 45.6 44.9 44.6

Imports 195.2 196.1 45.6 47.6 50.3 52.5

Source: BEA

* Including Petroleum & Products

2002

U.S. Balance of Payments and Trade

($ billions, SA, unless otherwise indicated)
2

The Dollar in Foreign Exchange Markets

The Federal Reserve Board’s broad nominal dollar 

index did not change significantly over the period. 

There was, however, a dichotomy in the dollar’s

performance against the two component currency

groupings in the broad index: the Federal Reserve

Board’s trade-weighted index of the dollar’s exchange 

value against seven major foreign currencies declined 

1.6% during the period while the index of the

currencies of the other important U.S. trading partners

(OITP) rose 2.5%

2

.

Exchange Rates in Dollars

(December 2001 = 100)

70

80

90

100

110

120

130

140

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

Canada China Euro Zone Japan

Korea Malaysia Mexico Taiwan

The appreciation of the dollar against the OITP

currencies over the second half of 2002 was largely due 

to currency depreciation in Latin America, particularly 

in Brazil and Mexico. The Brazilian real, which carries 

a 4% weight in the OITP index, depreciated 20.1% and 

the Mexican peso, which carries a 22.9% weight in the 

index, depreciated 4.3% over the period. 

G-7 Finance Ministers and Central Bank Governors 

referred to exchange rates among the major currencies 

in their September 27, 2002 communiqué, reaffirming: 

“We will continue to monitor exchange markets closely 

and cooperate as appropriate.”

The United States did not intervene in foreign

exchange markets during the period.

Major Industrial Economies

Euro Zone Countries

The Euro Zone current account surplus increased to 

1.1% of GDP (sa) during the period from 0.7% of GDP 

in the first half of 2002. Euro Zone exports, valued in 

dollars, rose 12.5% in the period from the first half of 

2001, while Euro Zone imports increased 9.2%. For 

 

2

The seven major currencies account for 54.6% of the weight 

in the broad index while the nineteen OITP countries account 

for 45.4%. 

2002 as a whole, the current account swung to a $60 

billion surplus from an $11 billion deficit in 2001.

The nominal euro appreciated 6.4% against the dollar, 

while the Eurostat index of the real effective exchange 

rate appreciated 3.7% over the period. The euro

appreciated 17.8% against the dollar in the year

through December 31, 2002.

Japan

The yen was virtually flat against the dollar during the 

period, appreciating 0.9%, to ¥118.8 at the end of 

December 2002 from ¥119.9 at the end of June 2002. 

JP Morgan’s real trade-weighted index of the yen, 

however, fell 2.2% under the pressure of Japanese 

deflation. The Ministry of Finance indicated that Japan 

did not intervene in the foreign exchange market 

during the period.

Japan’s current account surplus shrank to $54 billion 

(2.6% GDP) in the second half of 2002, down from 

$58 billion (3.0% GDP) in the first half of the year, 

reflecting a smaller merchandise trade and services

surplus and an increasing current account transfers

deficit. While the merchandise trade surplus grew 6% 

to $48.1 billion in the period, Japan’s services deficit 

expanded 17% to $22.5 billion, more than offsetting 

the growth in the merchandise trade surplus. The

growing services deficit, along with a larger transfers 

deficit, accounted for much of the overall decline in the 

current account surplus. 

Long-term financia l account outflows were very large 

during the period. Net outflows associated with direct 

investment and with portfolio investment in equities, 

bonds and notes reached $92 billion during the period, 

compared with $47 billion in the first half of 2002 and 

$79 billion in the second half of 2001. This long-term 

outflow for 2002 as a whole was the largest of the past 

decade.

Canada

The Canadian current account surplus declined to 1.3% 

of GDP (sa) during the period from 1.7% of GDP 

during the previous 6 months. The current account 

surplus has been below 2% of GDP for six consecutive 

quarters.

The Canadian dollar fell 3.9% against the U.S. dollar 

during the period, while the JP Morgan Broad Real 

Trade Weighted Index of the Canadian dollar fell

5.0%. For 2002 as a whole, the Canadian dollar 

appreciated 0.8% against the dollar. The Canadian 

dollar floats freely. A 1998 study by the Bank of 
3

Canada of its foreign exchange intervention concluded 

that its prior policy of regular intervention had very 

limited impact. Canada has not intervened in foreign 

exchange markets since 1998, except to make a small 

contribution to the brief G7 intervention in support of 

the euro in September 2000. 

Latin America

Economic and political uncertainty in a number of

countries undermined growth and capital flows for 

Latin America in 2002. Although the region saw real 

economic contraction of about 0.5% in 2002, prospects 

were improving by year-end with 2-3% growth for the 

region expected in 2003. In the second half of 2002, a 

sharp rise in Brazilian borrowing spreads contributed to 

the Latin America Emerging Market Bond Index

(EMBI+) reaching a spread of 1,399 basis points over 

U.S. Treasuries in September 2002 before falling to 

roughly 1,000 basis points in December. In general, 

adverse conditions led to weaker nominal exchange 

rates throughout the region in 2002. 

Argentina

The end of Argentina’s one-to-one peg of the peso to 

the U.S. dollar in early 2002 led to a sharp decline in 

the peso. The currency then stabilized and

strengthened from 3.81 Argentine pesos (ARP) per 

dollar at end-June to ARP 3.36 at end-December for a 

13.4% appreciation over the period. The peso has 

strengthened further in 2003. The government has 

eased deposit and exchange controls throughout the

year, although some restrictions remain in place.

After the severe economic and financial crisis at the 

end of 2001 and in the first half of 2002, economic 

indicators began to show an upward trend in the second 

half of 2002, with seasonally adjusted at an annual rate 

(saar) real GDP growth of 2.4% in the third quarter and 

3.4% in the fourth. Consumer prices spiked in April 

2002, but grew less rapidly thereafter with a net

increase of 41% for the year through December 2002 .

Outflows from the banking sector in the first half of the 

year were reversed in the period with total deposits 

increasing by ARP 5.6 billion. Interest rates on onemonth central bank debt fell from about 70% in August 

to less than 10% by end-December 2002. The

monetary base increased sharply in the second half of 

2002 but its growth rate fell in the first months of 2003. 

In 2002, Argentina enjoyed a current account surplus 

of 8% of GDP due to a trade surplus of $16.4 billion –

60% higher than in 2001 – with imports down 58% in 

2002 and exports down 5%. Argentine gross foreign 

exchange reserves grew by $847 million in the second 

half of 2002 for an end-December reserve figure of 

$10.5 billion.

Brazil

The real depreciated 20% over the period, with the 

decline concentrated in the run-up to presidential

elections in late-October. Market concerns forced the 

government to retire a significant portion of maturing 

debt as domestic and external demand for public

securities was inadequate to match rollover

requirements. 

The central bank took some steps to tighten monetary 

policy, such as increasing reserve requirements,

overnight repurchase operations, and raising the

targeted Selic overnight interest rate from 18% to 25% ,

over the September-December 2002 period. However, 

its inability to sterilize fully payments for retiring debt 

contributed to increasing the money supply at 50% and 

127% annualized rates in the third and fourth quarters 

respectively. A weakening currency and rising

monetary aggregates heightened inflationary pressures, 

with the year-on-year consumer price index increasing 

by 12.5% in December. 

Real (price adjusted) currency depreciation contributed 

to higher exports and helped reduce the current account 

deficit from 4.6% of GDP in 2001 to 1.7% in 2002. 

The central bank intervened in the foreign exc hange 

market in support of the real, with a resulting fall in net 

international reserves from $26.5 billion at end-June to 

$14.2 billion by end-December. 

Mexico

The Mexican peso, which freely floats, depreciated 

4.3% in the period following an 8.6% depreciation in 

the first half of 2002. JP Morgan’s index of the real 

trade-weighted value of the peso depreciated 1.8% in 

the period following a 2.8% depreciation in the first 

half of 2002. The recent depreciation in the real tradeweighted peso is a small reversal of appreciation over 

several years

Mexico’s macroeconomic fundamentals remain robust, 

although growth remained slow with real GDP in the 

period increasing at a 1.3% rate (saar) from the first 

half of 2002 and 1.9% from the comparable period of 

2001. The Bank of Mexico tightened monetary policy 

in September and December. In spite of the economic 

slowdown, fiscal discipline has been maintained, with 

the deficit at 1.6% of GDP during the period. 
4

The current account deficit fell to 1.3% of GDP in the 

period, helped by higher prices for oil (10% of exports) 

and by weak domestic demand curbing import growth. 

At $7.4 billion, inward direct investment covered over 

90% of the current account deficit in the period. During 

this period, international reserves grew by $6 billion, 

reaching $51.6 billion by end-December.

Central and Eastern Europe

In Russia, sustained high oil prices helped slow the 

ruble's rate of nominal depreciation against the U.S. 

dollar to 1% (31.45R/$ to 31.78R/$) during the period 

compared to 4% in the first half of 2002. Foreign 

exchange market intervention, in response to inflows 

from significant external borrowing by Russian

(mainly oil) companies as well as increased export 

receipts, helped boost res erves $5.5 billion to a record 

level $48 billion at end-December 2002. In Ukraine 

the hryvnia continued stable during the period at 

around 5.33 hryvnia/$.

After appreciating steadily for several years in real 

terms, the currencies of the major Central European 

economies were relatively stable during the period. 

This reflected both nominal depreciation versus the

euro, the key currency for trade, and a slowdown in 

inflation in the major area economies, including

deflation in the Czech Republic . For example, the 

Polish zloty weakened slightly (-0.8%) versus the euro 

in nominal terms during the second half of 2002, while 

strengthening by 5.0% versus the dollar (a reflection of 

the dollar’s decline against the euro). The drop in 

inflation due to tight monetary policy and favorable 

food prices supported the zloty’s weakening by 2.2% 

for the period (8.6% for the year) in trade-weighted 

real terms. The Hungarian forint saw sizable nominal 

gains against the euro in the period, but slowing

inflation allowed the forint to remain steady in real 

terms. In the Czech Republic, the nominal weakening 

of the crown against the euro (6.8% during the period) 

and deflation (0.4% y-o-y in December) contributed to 

a drop in the real effective exchange rate.

Asia

Economic recovery of emerging markets in Asia

moderated in the second half of 2002, as export growth 

slowed everywhere except for Indonesia and Korea. 

Virtually all economies had trade and balance of

payment surpluses, with China increasingly providing 

final processing and assembly of products from the rest 

of Asia ultimately exported to the U.S. Hence, while a 

number of Asian countries had large global trade and 

current account surpluses, China did not, because of its 

deficits with its Asian trading partners. 

Export growth softened in part because of softer OECD 

high-tech demand, while higher oil prices also affected 

the many oil importers in the region. Reserves 

generally increased significantly during the period,

with the exception of the Philippines. A number of 

economies continued to exp erience net investment and 

debt service outflows. In other cases, especially China, 

foreign direct investment (FDI) inflows growth

supported reserve increases. 

Inflation continued to decline throughout the region, 

with China and Hong Kong experiencing deflation. 

But exchange rate movements were mixed, with both 

Korea’s and Indonesia’s currencies appreciating on a 

real effective (REER) basis. Both Chinese and Hong 

Kong currencies weakened significantly in REER

terms because of the weight of their trade with Korea 

and Indonesia. The currencies of other economies 

weakened only moderately in REER terms, with

Taiwan and the Philippines weakening more than

others. 

China

China’s exports accelerated to a 30% y/y growth rate in 

the period, up from a 14% y/y growth rate in the 

previous half-year. Imports also accelerated to a 31% 

y/y growth rate from a 10% y/y rate in the previous 

period, so that China’s surplus of trade in goods rose 

modestly to $17 billion (2.5% of GDP) from $15 

billion (2.4% of GDP) a year earlier. 

The current account surplus for 2002 will probably rise 

modestly from the 1.5% of GDP level reached in 2001. 

China's current account surplus, as a per cent of GDP,

has declined significantly since 1997 when it reached 

4.1% and the deterioration of China's trade surplus in 

early 2003 suggests this trend will continue.

Although China had a relatively balanced global

position, U.S. data show China had a bilateral 

merchandise trade surplus with the U.S. of $60 billion 

during the period, compared to $49 billion in the same 

period a year earlier. In general, inputs from other 

emerging Asian countries are increasingly routed

through China for assembly and export, principally to 

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

its Asian trading partners. It has been estimated that 

China’s trade deficit with major emerging market

economies in East Asia was about $45 billion in 2001.

China maintains a de facto currency peg to the dollar, 

which it has kept within a tight band since 1995. 
5

Capital inflows increased sharply in the period, 

although the growth of FDI decelerated to 8% y/y from 

19% during the previous half. As a result of the higher 

current account surplus and higher capital inflows, 

gross foreign reserves grew 18% in the period to 

$243 billion. The JP Morgan index of the real tradeweighted renminbi stayed fairly stable, depreciating 

only 0.7%, during this period. China continues to

maintain wide-ranging controls on both capital

outflows and inflows. 

Korea

Korea’s overall economy did well in the period, with 

GDP growing 3.9% and 8.3% (q/q, saar) in the third

and fourth quarters of 2002, respectively. Stronger net 

exports boosted the current account surplus in the

period to 1.2% of GDP, versus 0.8% a year earlier. 

The capital and financial account excluding reserve 

accumulation recorded a small surplus of 0.3% of 

GDP, as domestic banks and firms increased foreigncurrency borrowing.

Korea maintains a floating exchange rate, intervening 

only to curb what it views as excessive volatility. The 

won appreciated 1.3% against the U.S. dollar on a 

nominal basis, while the JP Morgan real tradeweighted index appreciated 0.1% . Official intervention 

was modest. Gross reserves increased by $9 billion 

(8%) during the period to $121.4 billion, in part as a 

result of interest earnings and valuation adjustments as 

the euro appreciated against the dollar during the

period. As of December 2002, reserves were

approximately 188% of short-term external liabilities 

(residual maturity basis), a decrease from 235% at the 

end of June. Korea maintains relatively few restrictions 

on capital flows.

Taiwan

Taiwan’s economy grew by 4.1% and 4.7% (q/q, saar) 

in the third and fourth quarters, respectively. Its 

current account surplus grew to 8.9% of GDP in the 

period, up from 7.9% in the second half of 2001. 

Growing trade with Mainland China (a $13.9 billion 

bilateral trade surplus during the period) and higher 

foreign investment earnings are major factors in the 

large current account surplus.

Taiwan’s financial account excluding reserve

accumulation recorded a moderate, 1% of GDP, deficit 

during the period, as direct investment abroad surged, 

portfolio investment abroad exceeded inflows, and

foreign currency deposits increased in expectation of a 

Taiwan dollar (TWD) depreciation. The TWD

depreciated 3.2% on a nominal basis against the U.S. 

dollar during the period, while the JP Morgan real 

trade-weighted index depreciated 2.6%. Official

reserves grew by US$13 billion (9%) in the period to 

$162 billion (nearly 400% of total external debt).

Malaysia

Malaysia’s economy continued to expand in the period, 

with GDP growth accelerating to 6.2% (q/q, saar) in 

the third quarter before slowing to 3.0% in the fourth. 

Growth was underpinned by private consumption and 

development expenditure by the government, offsetting 

softening external demand. The current account

surplus declined to 7.4% of GDP in the third quarter of 

2002 (latest data available) from 9.9% a year earlier as 

a result of accelerating imports. Although the United 

States remained the largest destination of Malaysian 

exports, exports to ASEAN countries grew by 14.6% 

y/y, while exports to the United States grew by just 

5.1%.

Malaysia has maintained a fixed peg to the dollar since 

September 1998, when it also imposed capital controls. 

Controls have since been relaxed, but offshore trading 

of the ringgit remains prohibited and foreign portfolio 

investment by residents continues to be restricted. The 

Malaysian authorities have steadfastly maintained the 

peg despite alternating periods of downward and

upward pressure on the ringgit. The JP Morgan index 

of the ringgit’s real trade-weighted value depreciated 

1.9% during the period. Since the introduction of the 

peg, however, the ringgit has appreciated 7.4% in real 

traded-weighted terms. At the end of the period,

reserves stood at $34.6 billion, little changed from

levels in the first half of 2002.

Summary :

This report reveals a wide variety of exchange rate 

policies used by the major trading partners of the

United States. Based on a broad review Treasury

concluded that no major trading partners of the United 

States manipulated exchange rates under the terms of 

Section 3004 of the Act during the period3.

 

3

Section 3004 of the Omnibus Trade and Competitiveness Act of 

1988 requires the Treasury to analyze annually the exchange rate 

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

consider whether countries manipulate the rate of exchange between 

their currency and the dollar for purposes of preventing effective 

balance of payments adjustments or gaining unfair competitive

advantage in international trade. The Secretary of the Treasury is 

required to undertake negotiations with those manipulating countries 

that have material global current account surpluses and significant 

bilateral trade surpluses with the United States, unless such

negotiations would have a serious detrimental impact on vital

national economic and security interests.