What should we look at to predict exchange rate trends?
Trends in exchange rates between major currencies in the future will depend on a number of key behaviours. Central banks’ greater or lesser determination to combat inflation or maintain other objectives (public debt sustainability); this clearly pits Japan against other OECD countries, for example. Whether or not governments want a weak exchange rate to support industry and foreign trade (a clear example here is China). The evolution of the role of different currencies as international reserve currency raises geopolitical questions, as well as the euro zone’s ability to obtain risk-free status for peripheral euro-zone bonds. Of course, structurally, the trend in current account balances and external debt. Lastly, the level of risk perception, the risk of crisis, given the dollar's confirmed role as a safe haven.