Unit 2 · Level 2 · Currencies & FX
Unit review: FX
Recap: currencies move on rates, trade and confidence. The dollar sits on the throne: the world saves in it and panics into it. Carry trades harvest rate gaps and pay for it in rare, violent unwinds. And if you hold foreign assets, you hold foreign currency risk, whether you ever asked for it or not.
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What you get asked
Match each concept to its essence
Four ideas that explain most FX headlines you'll ever read. When a currency story breaks, ask: is this rates, trade, or confidence?
Roughly what share of global central-bank reserves is held in US dollars?
A clear majority, though down from about 70% in 2000. The slide is real but glacial: reserve thrones erode over generations, not news cycles.
In a carry trade you borrow the ___-rate currency and invest in the higher-rate one.
Cheap funding, rich target. The gap is your income; a sudden jump in the funding currency is your nightmare. See August 2024's yen shock.
The euro hit parity with the dollar in 2022 chiefly because:
Dollar cash paid clearly more than euro cash, so capital migrated west. An energy crisis on Europe's doorstep piled on: rates plus confidence, the classic one-two.
The smartest attitude to currency risk for most long-term investors:
FX forecasting humbles professionals daily; you don't need to win that game. Spread your exposure, know what you own, and let decades sand down the swings. 🐜
The rest of this unit
Why the euro in your pocket rises and falls against the rest of the world.