Foreign Exchange Markets: The Dollar in 1980

OREIGN exchange markets during 1980 were dominated by ac~iivityin domestic financial markets throughout the world.Dramatic changes in the direction of international capital flows during the year reflected the relatively volatile interest rate movements in the United States.While these interest rate movements appeared to be the major force affecting exchange rates during the period, however, rising rates of inflation and inflationary expectations, as well as midyear recessions in most industrial countries, also influenced exchange rate movements.This article describes and analyzes what occurred in foreign exchange markets in the past year with special emphasis on changes in the value of the U.S. dollar.First, however, the framework necessary to analyze movements of exchange rates is presented.Next, changes in the value of the U.S. dollar are analyzed in detail.Finally, the activity of U.S. policymakers within foreign exchange markets during the year is investigated.