The U.S. Dollar
The United States dollar is the world's main currency. All currencies are
generally quoted in U.S. dollar terms. Under conditions of international economic
and political unrest, the U.S. dollar is the main safe-haven currency which was
proven particularly well during the Southeast Asian crisis of 1997-1998.
The U.S. dollar became the leading currency toward the end of the
Second World War and was at the center of the Bretton Woods Accord, as the
other currencies were virtually pegged against it. The introduction of the euro in
1999 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 was designed to become the premier currency in trading by
simply being quoted in American terms. Like the U.S. dollar, the euro has a
strong international presence stemming from members of the European
Monetary Union. The currency remains plagued by unequal growth, high
unemployment, and government resistance to structural changes. The pair was
also weighed in 1999 and 2000 by outflows from foreign investors, particularly
Japanese, who were forced to liquidate their losing investments in eurodenominated assets. Moreover, European money managers rebalanced their
portfolios and reduced their euro exposure as their needs for hedging currency
risk in Europe declined.
The Japanese Yen
The Japanese yen is the third most traded currency in the world; it has a
much smaller international presence than the U.S. dollar or the euro. The yen is
very liquid around the world, practically around the clock. The natural demand to
trade the yen concentrated mostly among the Japanese keiretsu, the economic
and financial conglomerates.
The yen is much more sensitive to the fortunes of the Nikkei index, the
Japanese stock market, and the real estate market. The attempt of the Bank of
Japan to deflate the double bubble in these two markets had a negative effect
on 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. Its
nickname, cable, is derived from the telex machine, which was used to trade it
in 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 bout
with the Exchange Rate Mechanism, between 1990 and 1992, had a soothing
effect on the British pound, as it generally had to follow the deutsche mark's
fluctuations, but the crisis conditions that precipitated the pound's withdrawal from
the ERM had a psychological effect on the currency.
Prior to the introduction of the euro, both the pound benefited from any
doubts about the currency convergence. After the introduction of the euro, Bank
of England is attempting to bring the high U.K. rates closer to the lower rates in
the euro zone. The pound could join the euro in the early 2000s, provided that
the U.K. referendum is positive.
The Swiss Franc
The Swiss franc is the only currency of a major European country that
belongs 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 the
four major currencies, closely resembling the strength and quality of the Swiss
economy and finance. Switzerland has a very close economic relationship with
Germany, and thus to the euro zone. Therefore, in terms of political uncertainty
in 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 closely
resembles the patterns of the euro, but lacks its liquidity. As the demand for it
exceeds supply, the Swiss franc can be more volatile than the euro.