We heard a lot of talk in the foreign exchange markets in 1996 about the “end of volatility.” As the market performance of the last few weeks has demonstrated, such commentary was a bit exaggerated. However, even with the spike in volatility we’ve seen in recent weeks, there is no question that we have witnessed a remarkable period of relative stability in foreign exchange rates over the past six quarters or so. What accounts for this relative stability in the foreign exchange markets since late 1995? Economic fundamentals are certainly one factor -- we have had a period of relative price stability in the major world economies, and a general absence of severe market shocks. However, I would argue that what we’ve been observing is also, in part, a by-product of continuously greater transparency that has characterized the foreign exchange market over the past several years. Moreover, I am convinced that the increased transparency in the foreign exchange markets is beneficial: for the foreign exchange community, for financial markets in general, and for the global economy as a whole. Before explaining what I mean by greater transparency and why I believe it is so beneficial, I would like to take a quick look at the record itself. Is the talk about declining volatility reflected in hard evidence? Yes, it largely is.
Although I hope that the analysis will eventually develop to the extent that it is possible in a reasonably reliable way to take account of this type of risk in our forecasts we are not there yet. My view is that it may sometimes be justified to consider this kind of unforecastable risk  8  According to the theory of uncovered interest rate parity, the market expects the krona to weaken against the euro in the period ahead if Swedish interest rates are higher than those in the euro area. Uncovered interest rate parity also explains why the krona strengthened at the same time (and not afterwards) as Swedish interest rates increased relative to those in the euro area in 2010. However, the empirical support for uncovered interest rate parity is weak and there are many examples of deviations from the theory. For example, the krona strengthened more against the euro in 2010 than implied by uncovered interest rate parity. I refer to my speech “Many dimensions to well-balanced monetary policy”, dated 26 January 2011, for a more detailed discussion of the development of interest rates and the krona exchange rate in 2010. 8  BIS central bankers’ speeches  in our monetary policy decision-making. Ignoring such risks completely is, in my view, the same as saying that they do not exist, and that is a position that I would not want to defend.