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December 2, 2005
Getting the currency data right
From WSJ.com - Citigroup Unveils New Currency Measure Using Investor Fund Flows
The dollar has fallen 10% since the end of 1999, according to the popular U.S. Dollar Index, which measures the buck's performance against a basket of currencies. But Citigroup argues it is more accurate to say the dollar has tumbled less than 6% over the same period.
Why the discrepancy? Citigroup is rolling out a new way to measure changes in currency values. Instead of studying international trade flows to get a sense of the relative weightings of the world's currencies, the new Citigroup Flow Weighted Index looks at flows of capital back and forth among international investors. Citigroup argues that this is an important change because nowadays portfolio managers and speculators -- not large companies -- are responsible for the bulk of foreign-exchange activity.
. . .
Citigroup, one of the largest foreign-exchange dealers, estimates that about 70% of all currency transactions world-wide these days are related to investor fund flows, including trading done by stock and bond portfolio managers, hedge funds and other speculators, commercial banks and central banks. Only 30% of foreign exchange is related to transactions from the corporations that are measured in government trade data, Citigroup says.
This just confirms what a number of us have been pointing out for years: capital flows are driven by investment transactions, not trade. Trade accounts aren't even the tail - and they certainly don't have the power to wag the dog.
Posted by Ken Jarboe at December 2, 2005 12:50 PM
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