Dollarization in Ecuador

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Study Notes

Dollarization occurred in Ecuador in 2000, where a country unilaterally adopts the currency of another country.

The foreign exchange market (forex or FX market) is where exchange rates are set globally.
The forex market is not an organized exchange and trades are conducted "over the counter" and in many locations.
In April 2019, the global forex market traded $6.6 trillion per day, which is 29% more than in 2016, over three times more than in 2004, and over six times more than in 1992.
Major foreign exchange centers include London, New York, Singapore, and Hong Kong.
Other important centers for forex trade include Tokyo, Zurich, Paris, and Frankfurt.

The U.S. dollar is in a floating relationship with the yen, the pound, and the Canadian dollar.
The U.S. dollar is subject to a great deal of volatility due to its floating regime.
The euro was introduced in 1999 and floats against the pound and the yen.
The Danish krone provides an example of a fixed exchange rate.

The effective exchange rate is the weighted average of bilateral nominal exchange rate changes.
The formula to calculate the effective exchange rate is: ΔEEffective = (ΔEE1 × Trade1 + ΔEE2 × Trade2 + … + ΔEEN × TradeN) / EEffective.
The effective exchange rate can be calculated using different baskets of foreign currencies.

The value of the U.S. dollar depreciated by 35% against a basket of 7 major currencies from 2002 to 2008.
The value of the U.S. dollar depreciated by 25% against a broad basket of 26 currencies from 2002 to 2008.
The dollar was floating against major currencies but was fixed or tightly managed against other currencies, such as those of China and other Asian economies.

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