FOREIGN-exchange markets are suddenly in turmoil. The Swiss franc jumped by 30% in a matter of minutes last month. Over the past year, the Russian rouble has fallen by 40% against the dollar, while the Canadian and Australian dollar have recently dropped to six-year lows against the greenback. These shifts have proved costly for many in the markets. Alpari, a foreign-exchange broker, went bust, and Everest Capital, a fund manager, had to close its main hedge fund after suffering heavy losses. Why has currency volatility got worse? These shifts follow a long period in which currency markets have been relatively calm. There are two reasons for the recent volatility. The first is a divide between the Federal Reserve and the developed world’s other two big central banks—the Bank of Japan and the European Central Bank. The Fed has stopped its quantitative easing (QE) programme and may look to tighten monetary policy this year; meanwhile the Bank of Japan is still pursuing QE and the ECB has just agreed to start buying bonds. This shift has been driving the dollar higher against both the yen and the euro.

Secondly, falling commodity prices are bringing headline inflation rates down and causing economic weakness in some producing countries (such as Russia). This is leading many central banks to cut interest rates; 11 have done so (including the Canadians and Australians) since the start of November. Lower rates diminish the appeal of a currency to yield-seeking international investors. But governments are happy to see their currencies weaken in the current situation, when global economic growth is sluggish and a lower exchange rate might boost the prospects for exports.

The problems are exacerbated where a country has decided to peg its currency to another, such as the dollar or the euro. Denmark, which pegs its currency to the euro, has cut interest rates three times in recent weeks to discourage capital flows that might drive its currency higher. The Swiss, by contrast, abandoned their policy of capping the franc against the euro, which required them to buy increasing amounts of euro-denominated assets. Pegs are traditionally a way for countries to try to reduce volatility. But when they are abandoned, the effects can be dramatic.

Dig deeper:

Why the Swiss unpegged the franc (Jan 2015)

A deep recession is now a certainty for Russia in 2015 (Dec 2014)

Currency markets have suddenly got much more volatile (Jan 2015)