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

Date01 June 2016
AuthorSoo‐Hyun Kim,Kyuseok Lee
Published date01 June 2016
The Influences of Major Currencies
in Foreign Exchange Markets:
A Regression-Based Measure and
Its Application
College of Business Administration, Soongsil University, Seoul, Republic of Korea
College of Business, Korea Advanced Institute of Science and Technology (KAIST),
Seoul, Republic of Korea
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.
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

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