Financial exchange rates and international currency exposures

Our goal in this project is to gain a better empirical understanding of the internationalfinancial implications of currency movements. To this end, we construct a databaseof international currency exposures for a large panel of countries over 1990-2004.We show that trade-weighted exchange rate indices are insuffcient to understand thefinancial impact of currency movements. We show that our currency measure has highexplanatory power for the valuation term in net foreign asset dynamics: exchange ratevaluation shocks are sizable, not quickly reversed and may entail substantial wealthredistributions. Further, we demonstrate that many developing countries hold shortforeign-currency positions, leaving them open to negative valuation effects when thedomestic currency depreciates. However, we also show that many of these countrieshave substantially reduced their foreign currency exposure over the last decade....