Monday, October 22, 2007

USD vs Other Major Trading Currencies

In the picture above, I have plotted three weighted indices against the US$. (The weights and their calculations are given here.)
  • Major Currencies: The indices in pink are a weighted average of Euro, CAD, YEN, GBP, CHF, AUD, SKK.
  • Other Important Trading Partners: The indices in yellow are a weighted average of China, Mexico, Korea, Taiwan, HK, Malaysia, Singapore, BRL, Thai, India, Philippines, Israel, Indonesia, Russia, Saudi Arabia, Chile, Argentina, Colombia, Venezuela.
  • Broad: The indices in blue are the entire basket of the two.

These countries have been selected as those that have more than ½ % in 2003 in either exports or imports. The first group (pink) is those currencies that are traded extensively outside their domicile. The second group isn’t traded extensively outside their own markets.

What is most amazing in these numbers is the presence of clear volatility regimes in place. The daily standard deviation of these indices are given here:


Broad Index

Major Currencies


2nd Jan ’07 to 16th Mar ‘07




19th Mar ’07 to 19th Jun ‘07




20th Jun’07 to 19th Oct ‘07




Some conclusions:

  1. The credit-induced crises of confidence have led to increased volatility in the FX markets.
  2. The broad reaction has been – flight to safety. i.e., with respect to the Major currencies, the USD has been a “risky” holding. However with respect to the OITP, the USD depreciation has been lesser than expected – partly because the USD continues to be seen, on average, as a “safe” currency.
  3. The OITP depreciation masks wide variation – where Venezuela has done substantially differently than India against USD.
  4. Coupled with G7 consensus that Asian currencies should be “allowed” to get stronger – the OITP will be where the most diverse kind of action will be.
What does this portend for the future? My guess is that till the US economy picks up – the dollar slide against the Majors will continue. This is further aided by the Treasury’s policy of letting the dollar slide. The coming revaluation of the yuan will make this a really interesting group to think about. Need to think about this a bit more.

No comments: