Friday, July 10, 2009

The international role of the euro

A study called “The international role of the euro” published by the ECB just came out. The study showed that the currency preferences of the markets are quite stable and only in a limited way influenced by changes in overall financial activity, caused by the global crisis. This is in line with earlier conclusions that the international role of currencies tends to be relatively stable over time. It is however clear that the role of the euro is increasing. In markets that were tracked, like international debt markets, foreign exchange trading and global foreign exchange reserve holdings, the share of the euro increased from one to several percentage points.

Overall trading volume in the foreign exchange market declined quite significantly in 2008. Data from EBS showed that daily average trading volumes declined from USD 226 billion in the first three quarters to 179 billion in the last quarter, a drop of 21%. The report suggests that the drop may have been caused by the lack of trust among dealers in the interbank spot foreign exchange market. Additionally, market participants like hedge funds may have exited the market due to growing risk aversion and increasing costs.

There is also a special focus in the report on the currency choice in the issuance of foreign currency denominated bonds. The interesting conclusion there is that issuers prefer currencies with low nominal interest rates, while possible changes in foreign exchange rates do not have a significant influence on the currency choice.

There is a lot more information and data in the report, and I would suggest any interested readers to browse through it.

1 comment:

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