The Influences of Major Currencies in Foreign Exchange Markets: A Regression‐Based Measure and Its Application

• Date: 01 June 2016
• DOI: http://doi.org/10.1111/irfi.12070
• Author: Soo‐Hyun Kim,Kyuseok Lee
• Published date: 01 June 2016

The Influences of Major Currencies

in Foreign Exchange Markets:

A Regression-Based Measure and

Its Application

SOO-HYUN KIM†AND KYUSEOK LEE‡

†College of Business Administration, Soongsil University, Seoul, Republic of Korea

and

‡College of Business, Korea Advanced Institute of Science and Technology (KAIST),

Seoul, Republic of Korea

ABSTRACT

Based on the regression explanatory power, we propose a measure of the

relative influences of a group of major currencies, including the US dollar,

euro, Japanese yen, and UK pound, on the exchange rate behaviors of lesser

currencies. Using the measure and 27 sample floating currencies, we empiri-

cally examine the cross-currency and temporal variations in the relative

influences of two, three, and four major currencies during the 16-year post-

euro period of 1999 to 2014.

I. INTRODUCTION

The US dollar has been the world’s leading currency since the end of World War

II, and it continues to be the leading currency today (Norrlof 2014).1Neverthe-

less, the introduction of the euro in 1999 has led the international monetary

system into a new phase since the US dollar became the dominant currency

taking over from the UK pound. Mundell (2000) predicted that the world

economy would be characterized by a tripolarism based on the US dollar, euro,

and Japanese yen. Against this backdrop, a number of prior studies have exam-

ined how the international monetary system evolves over time. These studies

have primarily focused on the power analysis of major currencies such as the US

dollar (USD), euro (EUR), Japanese yen (JPY), and UK pound (GBP) in terms of

the use of currencies in international transactions and central banks’ foreign

exchange reserves, and the autonomy and influence of monetary, political, and

military policies (Fratianni and Hauskrecht 1998; Portes and Rey 1998; Mundell

2000; Bergsten 2002; Kenen 2002; Chinn and Frankel 2005; Eichengreen 2005;

1 According to the BIS Triennial Central Bank Survey 2013, the USD accounts for 43.5% of

global foreign exchange turnover, followed by the EUR accounting for 16.7%, the JPY for

11.5%, and the GBP for 5.9%.

DOI: 10.1111/irfi.12070

© 2015 International Review of Finance Ltd. 2015

International Review of Finance, 16:2, 2016: pp. 277–289