Address by Mr T.T. Mboweni, Governor of the South African Reserve Bank, ACI meeting, Pretoria, 14 May 2001  1.    INTRODUCTIONI would like to thank ACI for the opportunity to address you this evening. Of course I have been aware of the existence of ACI but I was reminded about it again when Mr Gibbs backed the Code of Trading Principles, as agreed to by sixteen leading intermediaries in the foreign exchange market, and released it to the press on 22 February 2001. The Reserve Bank values ACI’s endorsement of these Trading Principles. I thank you all for your willingness to come to Pretoria as I believe that most of you work in Johannesburg. I understand also that your presence reflects a common interest in financial markets - and not merely a desire to gain an advantage over your competitors by obtaining better insights into the thought-processes of central bankers!Apparently many of you are foreign exchange dealers or are close to the foreign exchange market, so I have chosen to talk to you about volatility in the currency market and about monetary policy. I will first attempt to give some background information against which volatility in the currency markets has developed and will then proceed to discuss developments in some of the major and emerging market currencies. The focus will then move to developments in the exchange rate of the rand and its potential impact on inflation and consequently on monetary policy in South Africa. I will also, as far as I am able, attempt to address some other areas you may be interested in. 2.    DEVELOPMENTS IN THE CURRENCY MARKETS IN 2000 AND 2001The so-called "emerging markets crisis " in 1997 and in 1998 was a major event which adversely affected many emerging market economies. Currency weakness and tighter monetary policies impacted significantly on economic performance, as was the case in South Africa. We certainly looked forward to a period of relative calm from 1999 onwards. Unfortunately, the financial markets have not afforded us this opportunity and volatility has been a somewhat persistent feature of the financial markets in the year 2000 and 2001 to date.The most volatile markets have been the stock markets, particularly those trading technology stocks - and probably also media and telecommunication stocks - the well-known trilogy, TMT stocks. However, the volatility has also extended to the fixed income and currency markets. In the case of stock markets, the Nasdaq for example has declined by no less than 37 per cent in the calendar year 2000 and by a further 17,6 per cent in the current year to date. According to Bloomberg news services, the historical price volatility over a ten-day period reached levels in excess of 70 per cent per annum in April 2001. In early January 2001, the volatility appeared to be even higher. From its peak on 10 March 2000, the Nasdaq has fallen by a staggering 58,3 per cent. The Dow Jones index has also declined but not by the same magnitude. It declined by 5½ per cent during 2000 and has remained virtually unchanged in the year to date, with historical volatility reaching levels around 32 per cent in March and April of this year. Other stock market indices have declined in sympathy with Wall Street. Fortunately, as a matter of interest, the all share price index of the JSE Securities Exchange has increased by some 5,1 per cent since the beginning of 2000 to date.For most of the last decade the financial world has closely watched the economic expansion of the United States, which seemed to defy what had been learnt about business cycles, and the concomitant monetary policy tightening by the Federal Reserve from late 1999. Similarly, in the euro area and in the United Kingdom, both the ECB and the Bank of England were also in monetary policy tightening modes for most of 2000. The tightening in the euro area and in the UK, however, was in reaction to inflationary pressures which resulted mainly from higher oil prices. Based on a perception that monetary policy was entering an uncertain phase in the major economies of the world in the latter h