Major Currencies

Major Currencies

The U.S. Dollar
The United States dollar is the world's main currency. All currencies aregenerally quoted in U.S. dollar terms. Under conditions of international economicand political unrest, the U.S. dollar is the main safe-haven currency which wasproven particularly well during the Southeast Asian crisis of 1997-1998.The U.S. dollar became the leading currency toward the end of theSecond World War and was at the center of the Bretton Woods Accord, as theother currencies were virtually pegged against it. The introduction of the euro in1999 reduced the dollar's importance only marginally.The major currencies traded against the U.S. dollar are the euro,Japanese yen, British pound, and Swiss franc.

The Euro
The euro was designed to become the premier currency in trading bysimply being quoted in American terms. Like the U.S. dollar, the euro has astrong international presence stemming from members of the EuropeanMonetary Union. The currency remains plagued by unequal growth, highunemployment, and government resistance to structural changes. The pair wasalso weighed in 1999 and 2000 by outflows from foreign investors, particularlyJapanese, who were forced to liquidate their losing investments in eurodenominatedassets. Moreover, European money managers rebalanced theirportfolios and reduced their euro exposure as their needs for hedging currencyrisk in Europe declined.

The Japanese Yen
The Japanese yen is the third most traded currency in the world; it has amuch smaller international presence than the U.S. dollar or the euro. The yen isvery liquid around the world, practically around the clock. The natural demand totrade the yen concentrated mostly among the Japanese keiretsu, the economicand financial conglomerates.The yen is much more sensitive to the fortunes of the Nikkei index, theJapanese stock market, and the real estate market. The attempt of the Bank ofJapan to deflate the double bubble in these two markets had a negative effecton the Japanese yen, although the impact was short-lived

The British Pound
Until the end of World War II, the pound was the currency of reference. Itsnickname, cable, is derived from the telex machine, which was used to trade itin its heyday. The currency is heavily traded against the euro and the U.S.dollar, but has a spotty presence against other currencies. The two-year boutwith the Exchange Rate Mechanism, between 1990 and 1992, had a soothingeffect on the British pound, as it generally had to follow the deutsche mark'sfluctuations, but the crisis conditions that precipitated the pound's withdrawal fromthe ERM had a psychological effect on the currency.Prior to the introduction of the euro, both the pound benefited from anydoubts about the currency convergence. After the introduction of the euro, Bankof England is attempting to bring the high U.K. rates closer to the lower rates inthe euro zone. The pound could join the euro in the early 2000s, provided thatthe U.K. referendum is positive.

The Swiss Franc
The Swiss franc is the only currency of a major European country thatbelongs neither to the European Monetary Union nor to the G-7 countries.Although the Swiss economy is relatively small, the Swiss franc is one of thefour major currencies, closely resembling the strength and quality of the Swisseconomy and finance. Switzerland has a very close economic relationship withGermany, and thus to the euro zone. Therefore, in terms of political uncertaintyin the East, the Swiss franc is favored generally over the euro.Typically, it is believed that the Swiss franc is a stable currency.Actually, from a foreign exchange point of view, the Swiss franc closelyresembles the patterns of the euro, but lacks its liquidity. As the demand for itexceeds supply, the Swiss franc can be more volatile than the euro.