The Yen,the US dollar,and the trade weighted basket of currencies: Does the choice of anchor currencies matter in identifying incidences of speculative attacks?

Early constructions of a single crisis index known as the exchange market pressure (EMP) index have largely been based on the fluctuations of the real or nominal exchange rate of a currency against the US dollar—the most commonly accepted anchor currency in the global market. Hardly any studies have however tested the sensitivity of this crisis index to the choice of different “anchor” currencies. To address this pertinent issue, our study considers the EMP indices of the Indonesian rupiah, Malaysian ringgit and Thailand baht constructed by adopting three different exchange rates—the real effective rate, the local currency against the US dollar, and the local currency against the Japanese yen for the period of 1985–2003. The test results indicate that the reported incidences of speculative attacks are highly sensitive to the choice of anchor currencies.     

East Asian equity markets,financial crises,and the Japanese currency

The paper studies the interactions between the US and four East Asian equity markets. The focus is on the change in the information structure/flow between these markets triggered by the 1997 Asian financial crisis. It is shown that the information structure during the crisis period is different from that in the non-crisis periods. While the US market leads the four East Asian markets before, during, and after the crisis, it is Granger-caused by these markets during the financial crisis period but not in the post-crisis sample. Further, in accordance with concerns reported in the market, the Japanese currency is found to affect these equity markets during the crisis period. The Japanese yen effect, however, disappears in the post-crisis sample. The Japanese currency effect is quite robust as it is found from both local currency and US dollar return data and in the presence of Japanese stock returns. J. Japanese Int. Economies 21 (1) (2007) 138–152.     

Exchange-rate policy in East Asia after the fall: how much have things changed?

This paper evaluates the changes in the exchange-rate policies of East Asian economies in the aftermath of the currency crisis and the process in which the exchange-market stability was re-established. The empirical analysis evaluates the changing roles of the yen and the US dollar in the currency baskets, the shifts in the volatility of the underlying macroeconomic fundamentals and their implications on exchange-rate management, the exchange-market perception of credibility and risk of the postcrisis exchange-rate regimes, and the process of reversion to fundamental values after the massive currency depreciation.The analysis shows that after the abandonment of the quasi-dollar peg, the yen had gained a greater weight in the currency baskets and the greater flexibility in which the exchange rates are being managed serve to accommodate the greater volatility in the macroeconomic fundamentals. The improvement in the macroeconomic conditions and the greater credibility that has been acquired by the regional monetary authorities had allowed the exchange market to stabilize and enabled the exchange rates to revert back to their fundamental values.     

Fractal structures and naive trading systems: Evidence from the spot US dollar/Japanese yen

This study investigates whether daily logarithmic returns on the spot US dollar/Japanese yen (USD/Yen) for the period 3 March 1987 to 8 September 1993 displayed an underlying fractal structure. The analysis employed a rescaled range (R/S) technique, and revealed USD/Yen persistence which favoured continued depreciation of the USD. The results suggest the presence of time or memory effects in the currency. These effects were arbitrageable by speculators who by holding long Yen positions were able to earn positive returns.     

Managing the renminbi: should China peg to a trade‐weighted basket?

Pegging the renminbi (RMB) to the US dollar since 1994 has characterised China's exchange rate policy under a fixed peg or appreciating crawling peg. The current policy, announced in June 2010, of ‘floating with reference to a basket’ made the RMB 25 per cent stronger against a trade‐weighted basket by early August 2015, while it was 10 per cent stronger against the US dollar. Thus, 14 percentage points arose from changes in the cross rates of the other currencies, notably from the fall of the euro since December 2014. Devaluation of the RMB by 3 per cent in August 2015 just covered the effective appreciation since December 2014. Effects of the cross rates of other currencies could be eliminated by managing the external value of the RMB with reference to a genuine trade‐weighted basket. This could be a suitable intermediary exchange rate regime for China, as the risks associated with free floating are still great. Diversifying further the currency composition of the foreign exchange reserves and other foreign assets of the Chinese government, from US dollars towards euro and yen assets, would be a natural parallel shift. The euro–US dollar–yen exchange rates in late summer 2015 may offer a good opportunity to carry out this move.     

主权货币国际化内在矛盾及其策略选择——兼论国际货币体系多元发展路线的历史逻辑

美元作为主权货币国际化,在适应并促进世界经济增长的同时,其内在矛盾成为世界经济失衡、汇率大幅波动以及流动性泛滥的重要因素。解决美国主权货币国际化助推的贸易赤字、财政赤字和巨额债务问题,需要美国政府财政政策、货币政策和产业政策的重大调整,还需要国际货币体系的重大改革,从美元主导的单一货币模式转变为多元模式。美元、欧元以及正在走向国际化的人民币共同构成代表和主导北美、欧洲、亚洲等三大经济圈、覆盖全球经济体的国际货币体系。研究主权货币国际化的内在矛盾以及国际货币体系多元发展路线的历史逻辑,对有效应对复杂多变的国际经济环境,加快人民币国际化进程具有理论和决策参考价值。     

Currency Networks, Bilateral Exchange Rate Volatility and the Role of the US Dollar

We investigate monthly bilateral exchange rate volatility for a large sample of currency pairs over the period 1999?C2006. Pegs (particularly to the US dollar) and managed floats tend to have lower volatility than independent floats. A deeper investigation shows that the peg effect operates almost entirely through currency networks (i.e. where two currencies are pegged to the same anchor currency), and the lower volatility of US dollar pegs reflects the size of the US dollar network. Managed floats show clear evidence of tracking the US dollar, further increasing the effective size of the US dollar network. Inflation undermines the currency-stabilizing effect of peg networks. Currencies in smaller peg networks have higher unweighted but not trade-weighted exchange rate volatility, which is consistent with anchors being chosen to minimize trade-weighted volatility. The size of the effective US dollar network revealed here is a plausible explanation of the rarity of basket pegs. Volatility also reflects a range of structural factors such as country size, level of development, population density, inflation differentials and business cycle asymmetry.     

Exchange rate movements and foreign direct investment (FDI): Japanese investment in Asia, 1987–2008

The paper estimates the impact of exchange rate movements on foreign direct investment (FDI). By using the panel data of Japanese FDI flows to nine dynamic Asian economies during 1987–2008, the paper finds that (i) FDI declined with a depreciation of the yen against host country currencies; (ii) it increased with exchange rate volatility; and (iii) it was little affected by the Asian financial crisis, especially when disguised financial flows were removed from the data. A novel result concerns the negative response of FDI to the third moment of monthly exchange rate changes: the volume of FDI was smaller when the distribution was positively skewed (i.e., when the yen was biased towards relatively large depreciation shocks). If skewness proxies for expected mean-reverting changes, this supports the idea that source country investors care about the future stream of revenues and returns denominated in their own currency. These results are robust, with other standard control variables having statistically significant coefficients with expected signs.     

中国黄金市场与外汇市场间收益、波动溢出效应实证分析--基于VEC-DCC(BEKK)-BVEGARCH模型

用向量自回归动态二元EGARCH模型,对中国黄金市场与外汇市场间的收益与波动,在金融危机前后溢出效应进行分析。研究显示：美元兑人民币汇率和中国黄金不存在溢出效应,欧元兑人民币汇率对黄金存在负向溢出效应;较之金融危机以前,美元和欧元兑人民币汇率对黄金收益的波动溢出效应减弱,尤其是美元,危机前,黄金市场对来自美元和欧元外汇市场的信息冲击,存在显著＂杠杆效应＂;危机期间,市场间＂杠杆效应＂减弱。     

Asian Currency Crisis and the Generalized PPP: Evidence from the Far East

The present paper investigates the effects of the Asian currency crisis of 1997–1998 on the generalized PPP between several real exchange rates of the Far East countries. Monthly log of real exchange rates of the currencies of Thailand, Malaysia, Indonesia, the Philippines and South Korea vis-à-vis the US dollar and the Japanese yen during 1990–2004 are applied in the investigation. Further tests are conducted between exchange rates vis-à-vis the Thai baht. Tests are conducted for periods before and after the crisis. Results from the Johansen method of multivariate cointegration show a substantial change in the relationship between these real exchange rates before and after the Asian currency crisis. This result is found using rates based on three currencies: US dollar, yen and baht.     

Asian foreign exchange risk exposure

We find that about 25 percent of Asian firms experienced economically significant exposure effects to the US dollar and 22.5 percent to the Japanese yen for the period January 1993 to January 2003. The overall extent of exposure is not sample dependent; a depreciating (appreciating) Asian currency against foreign currencies has a net negative (positive) impact on stock returns. The extent to which firms are exposed to exchange rate fluctuations varies with return horizons; short-term exposure seems to be relatively well hedged, where considerable evidence of long-term exposure is found. Firms with weak liquidity positions tend to have smaller exposures. J. Japanese Int. Economies 21 (1) (2007) 16–37.     

Monetary Integration In Eastern And Southern Africa: Choosing A Currency Peg For Comesa

African countries involved in monetary integration projects have been advised to peg their currencies against an external anchor before the definite fixing of exchange rates. In this study, we estimate optimum currency area indices to determine, between four alternatives, which international currency would be the most suitable anchor for Common Market for Eastern and Southern Africa (COMESA) members and for a set of other selected African economies. We conclude that the euro and the British pound prevail over the US dollar or the yen; that the euro would be the best pegging for most, but not all, COMESA members; and that some of these economies display evidence of more intense integration with third countries, with which they share membership in other (overlapping) regional economic communities, than within COMESA.     

European crises and the Asian economies

This paper analyses the impact of recent financial crises in Europe on the Asian economies. What is often abbreviated to GFC included three distinct crises: the 2007–2008 North Atlantic financial crisis, a 2008–2009 global economic crisis and public finance crises which became increasingly focussed on the eurozone in 2010–2012. Asia did not experience significant financial crises, and the open economies recovered relatively rapidly from the global economic crisis. The relative weight of Asian economies in the global economy, which had been increasing for several decades, grew even more rapidly in 2009–2011 as the economies of the USA and Europe faltered. This poses challenges for global economic governance, although there are constraints on Asia being a more assertive force. Problems in the eurozone hold lessons for Asia; the euro and the Schengenzone are positive responses to the emergence of increasingly complex supply chains. In a similar context, East Asia is moving hesitantly toward financial cooperation and adopting second-best approaches, such as de facto dollar pegs, to reducing bilateral exchange rate volatility.     

Was it really a dollar peg?: The exchange rate policies of East Asian countries, 1980–1997

This paper examines the exchange rate policies of East Asian countries during the period preceding the currency crisis of 1997, in an attempt to ascertain the extent to which they could be considered, as they frequently are, as a dollar peg. We do so by estimating the implicit weights of foreign currencies in the nominal exchange rate determination of East Asian currencies by means of a time-varying parameter model. The crucial element of our approach concerns how the weight of the Japanese yen was altered in response to the movement of the yen–dollar exchange rate. It is found that, while the weight of the U.S. dollar was large and the weight of the Japanese yen was small for the period as a whole, the weight of the yen was raised in some of the countries in the early 1990s. In particular, the Korean and Malaysian authorities raised the weight of the yen when the yen depreciated against the U.S. dollar, while the Singaporean authorities raised the weight of the yen when the yen appreciated against the dollar.     

The euro and its consequences: What makes a currency strong?

The creation of the Economic and Monetary Union (EMU) and the introduction of the euro was one of the great events in economic history after World War II. The basic attractiveness of the euro is its large and expanding transaction size and the independent central bank which pursues price stability as its primary goal. The basic strength of the dollar is the hysteresis effect based on economies of scale and network externalities. The conclusion in the paper is that at present the hysteresis effect dominates the sheer size effect and the dollar remains the key vehicle currency while the euro has established itself as the second most widely used currency in the world. The euro depreciated against the dollar in the first three years after its introduction. In the paper the euro weakness is explained by the positive growth differential in favor of the U.S. economy caused by the advance in IC-technology and a pick-up in total factor productivity. In the medium run, the outlook for the euro is favorable. The U.S. current account deficit is unsustainable and improvements require a substantial depreciation of the dollar.Distinguished Address presented at the Fifty-Fourth International Atlantic Economic Conference, Washington D.C., October 10–13, 2002.     

Restructuring East Asian exchange rate regimes

This paper investigated the degree of misalignment of the East Asian currencies against the U.S. dollar and against the Japanese yen under a de facto dollar-pegged exchange rate regime (January 1995 to May 1997). We found that overvaluation against the yen started in the Malaysian ringgit and the Philippine peso from January 1996 and the Thai baht from June 1996. Although the Indonesian rupiah and the Korean won against the yen were still undervalued in May 1997, degree of misalignment of both currencies narrowed from April 1995. Large withdrawal of Japanese claims after the financial crisis reduced Japanese bank lendings from $123.8 billion to $85.9 billion in end-June 1998. In 1998, Japanese Foreign Direct Investment (FDI) to East Asia fell as much as 44% from the previous year. In conclusion the paper stresses the importance of the stability in yen/dollar exchange rate to avoid large volatility in Japanese capital flow.     

Yen bloc or koala bloc? Currency relationships after the East Asian crisis

During the 1990s, several studies found evidence for a “yen bloc”, a significant and strengthening relationship between the Japanese yen and East Asian currencies possibly due to regional trade and investment by Japan. It appears that the Australian dollar now plays a similar role in the East Asian region, and the linkages between the Australian dollar and the Asian currencies show as much support for a “koala bloc” as a “yen bloc”. This study concludes that the US dollar appears to have declined in importance in post-1997 crisis East Asia, while Australia and Japan are becoming increasingly important regional influences.     

Optimal currency shares in international reserves: The impact of the euro and the prospects for the dollar

Foreign exchange reserve accumulation has risen dramatically in recent years. The introduction of the euro, greater liquidity in other major currencies, and the rising current account deficits and external debt of the United States have increased the pressure on central banks to diversify away from the US dollar. A major portfolio shift would significantly affect exchange rates and the status of the dollar as the dominant international currency. We develop a dynamic mean-variance optimization framework with portfolio rebalancing costs to estimate optimal portfolio weights among the main international currencies. Making various assumptions on expected currency returns and the variance–covariance structure, we assess how the euro has changed this allocation. We then perform simulations for the optimal currency allocations of four large emerging market countries (Brazil, Russia, India and China), adding constraints that reflect a central bank's desire to hold a sizable portion of its portfolio in the currencies of its peg, its foreign debt and its international trade. Our main results are: (i) The optimizer can match the large share of the US dollar in reserves, when the dollar is the reference (risk-free) currency. (ii) The optimum portfolios show a much lower weight for the euro than is observed. This suggests that the euro may already enjoy an enhanced role as an international reserve currency (“punching above its weight”). (iii) Growth in issuance of euro-denominated securities, a rise in euro zone trade with key emerging markets, and increased use of the euro as a currency peg, would all work towards raising the optimal euro shares, with the last factor being quantitatively the most important. J. Japanese Int. Economies 20 (4) (2006) 508–547.     

From the Gold Standard to a Bipolar Monetary System

This paper argues that the international monetary system will evolve into a bipolar structure consisting of a dollar area and a euro area, each of which attracting other countries to their gravitational centers. A deepening and widening of NAFTA and the EU will enlarge the sphere of influence of both currencies; trade wars will restrict them. The yen is a big question mark. The deep and still unresolved financial crisis in Japan works against the enlargement of the yen; deregulation of its financial markets, with the attendant decline in transaction costs, goes in the opposite direction. Our conclusion is that the yen area will be much smaller than the dollar and the euro area and, consequently, the two large blocs will shape the international monetary system of the 21st century in a critical way. We also discuss feasible scenarios of interaction between currency blocs. A large EMU works in favor of cooperation because fewer players imply lower decision-making costs in reaching a cooperative solution. The relative closeness of the EMU and the United States, on the other hand, works against cooperation and in favor of benign neglect. Exchange-rate agreements are fragile unless supported by strong commitment to economic policy cooperation, and such a commitment may well be premature. The article advocates that the United States and EMU target common inflation rates, an idea that Keynes proposed back in 1923.     

China's Exchange Rate Movements and Corporate Currency Invoicing Strategies

Since China introduced a new managed floating exchange rate regime in 2005, the persistent appreciation of the renminbi against the US dollar has led Chinese firms to reassess their choice of invoice currency among the dollar and other international alternatives to price their exports. The present paper performs a systematic invoice currency analysis by surveying the published literature, summarizing criteria for decision-making, and evaluating the choices available to Chinese exporters implementing currency invoicing strategies to maximize expected profits. This study finds that the euro could play an increasing role as the invoice currency of Chinese firms, although the US dollar will still play a dominant role. Chinese exporters might shift gradually from the dollar to the euro in the face of the falling dollar, balancing between the two by necessity.