Session 13 • FX 101 • Systems • Trinity • Who runs USD • Dollar Index • Hedge Mini-Lab

Plain-English, click-and-learn.

Legend: “USD UP” = stronger dollar (DXY↑, EURUSD↓, USDJPY↑). “USD DOWN” = weaker dollar (DXY↓, EURUSD↑, USDJPY↓).

0) What is the FX market? (60-second version)

  • FX = Foreign Exchange: where currencies trade (EUR, JPY, GBP, etc.).
  • It’s huge: banks, funds, companies, tourists—24/5, mostly electronic.
  • Why it moves: interest rates, growth, inflation, risk mood, flows, policy news.
  • Why you care: import costs, export revenue, travel, foreign investing.
Quick terms:
Spot = trade now. Forward = lock a future rate.
EURUSD means USD per 1 EUR. EURUSD ↑ ⇒ USD buys fewer euros (USD weaker).

0a) Base vs Quote Currencies (60s)

If blocked, watch on YouTube.

0b) What is Forex? (60s)

If blocked, watch on YouTube.

1) Two exchange-rate systems (and who uses what)

Floating vs Fixed/Pegged

  • Floating: Market sets the rate; central bank mostly watches.
  • Fixed/Pegged: Central bank holds a target (needs FX reserves & discipline).
Who uses what (simple view):
  • USA, Euro area, UK, Canada, Australia, New Zealand: free-floating.
  • Japan: float, occasional intervention in extremes.
  • Switzerland: float, leans against extreme CHF moves.
  • China: managed float—basket reference, band, managed pace/level.

Who “runs” the USD day-to-day?

  • Federal Reserve (FOMC): sets interest rates → big FX driver.
  • U.S. Treasury (ESF): decides on any FX intervention (rare).
  • New York Fed: executes FX ops for Treasury/Fed.
Key idea: The White House can talk, but markets + Fed policy dominate most of the time.

2) The “Impossible Trinity” (pick 2, you lose the 3rd)

Reality: you can slide around a bit, but all three at full power is not sustainable.
Pick any 2…

Impossible Trinity — pick two

Choose any two. The third “loses” and a popup explains the outcome.

Impossible Trinity Triangle Pick two among free flows, fixed FX, independent policy. Free capital flows Fixed exchange rate Independent policy 😭 🏆 🏆 🏆
Pick any two…
You can’t have all three maxed.

The Impossible Trinity - 60 Second Adventures in Economics (5/6)

If blocked, watch on YouTube.

3) The Dollar Index (DXY) — basket, weights, and “price of $”

DXY tracks USD vs a fixed, legacy basket (maintained by ICE). Rough weights:

CurrencyWeight (≈)
EUR57.6%
JPY13.6%
GBP11.9%
CAD9.1%
SEK4.2%
CHF3.6%
AUD/NZD/NOK aren’t in DXY (though they’re majors elsewhere).
—
Read it: DXY > 100 ⇒ USD stronger than base (Mar-1973 = 100); < 100 ⇒ weaker.
Open live DXY (Yahoo Finance) Reminder: DXY ≠ FRED Broad USD (different base/basket). Levels differ; trends often rhyme.
History & why no AUD in DXY
  • Launched: March 1973 at 100.000 (post–Bretton Woods).
  • Maintainer: ICE (Intercontinental Exchange). Futures ticker: DX.
  • Only change: 1999 swapped old European currencies for the euro. Otherwise the 6-currency basket is unchanged.
  • SEK is original; AUD was never in DXY. AUD appears in other dollar indexes (Fed majors; Bloomberg BBDXY).

4) Why a president might talk about a “weaker dollar”

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Trade-off: Weaker USD can help exports but raises import costs (inflation). Control is limited near-term.

5) Why the USD goes up or down (and common “weak USD” stories)

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Common “USD weaker” combo:
  • Rate gap shrinks (US cuts / others hike).
  • Risk-on → flows into non-USD assets.
  • Dovish Fed vs others.
  • US fiscal/external deficits (longer-run).

Live USD Index (FRED) + What-if Path

Source: FRED DTWEXBGS (Broad USD). Latest official close + a 12-month projection based on your sliders.

Assumptions for projection:
US rates vs rest:  US growth vs rest:  Risk mood:

If the API call is blocked or you omit a key, a daily-updating FRED image will appear (no projection overlay).

6) Stablecoins: likely impact on major FX?

Mechanics & myths — Treasuries, “money supply,” and FX
  • Minting: bank $ → issuer → reserves in T-bills/treasury repo/cash → token 1:1.
  • Not printing money: deposits shift from banks to issuer’s reserve fund; base money doesn’t mechanically expand.
  • T-bill demand: large issuers are major bill buyers; can nudge front-end yields a touch alongside bigger forces (Fed, issuance, data).
  • FX levels: plumbing helps settlement; majors still mainly track rate differentials, growth, flows, and risk mood.
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Bottom line for majors (USD/EUR/JPY): settlement tech is improving, but exchange rates still mostly track rate differentials, growth, flows, and risk mood.

8) U.S. borrowing (debt), tariffs, and rare-earths — quick USD impact

Near-term USD follows rates & risk mood; longer-run fiscal stories can shape the trend.
Pick one or more…
Cheat codes:
  • More borrowing → more Treasuries; if yields rise, carry can support USD (until sustainability worries bite).
  • Tariffs → higher import prices (inflation) + uncertainty; tighter Fed or risk-off can lift USD; retaliation/growth drag can offset.
  • Rare-earth pinch → supply shock to tech/EV/defense; risk-off can lift USD; if it hurts U.S. growth, that leans the other way.

8b) EU exporters/importers & stablecoins — should they use them?

Pick a role, invoice currency & option…
Rule of thumb: Match the token/rail to your invoice currency. Stablecoins change the rail (speed/availability), but they don’t remove FX—they just move where it happens.
FX legs will appear here.
Projection, not current usage: Corporate settlement via stablecoins is still niche; USD-denominated coins generally have deeper liquidity and on/off-ramps than EUR coins.

9) Tiny Hedge Lab — Futures (BUY/SELL only)


Cheat codes:
  • Importer (pays EUR): fears EUR↑ → BUY EUR futures (go long 6E).
  • Exporter (receives EUR): fears EUR↓ → SELL EUR futures (go short 6E).
Futures are standardized (CME 6E); we’re not doing any math here—just the direction.
Pick your role and click Show Recommendation.

10) Homework — Debate (no math): “Do we want a cheap dollar or a strong dollar?”

Team Strong Dollar

  • Cheaper imports → lower input costs; helps consumers & firms.
  • Inflation check → strong FX can dampen import-price inflation.
  • Capital magnet → global savings buy USD assets in uncertainty.
  • Policy credibility → signals confidence in institutions.
  • Travel power → Americans abroad get more for their money.
Counter: hurts exporters’ price competitiveness; can widen trade deficit optics.

Team Cheap Dollar

  • Boost exports → helps factories & tradable sectors.
  • Tourism lift → U.S. becomes cheaper to visit.
  • Import substitution → nudge toward domestic production.
  • Debt optics → weaker USD can lower trade gap optics (not the same as fixing it).
Counter: raises import costs (inflation); can pressure real incomes.

Ready to check your understanding?

15 quick questions • no math • takes just a few minutes.
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