Euro Cross-Rates

April 14, 2009

Currency market participants use the term “cross rates” to refer to the euro’s rate of exchange against a currency other than the U.S. dollar.  Three cross rates that hold special importance are the sterling cross, Swiss franc cross, and yen cross.  These three crosses do not move in tandem even though they all now represent low-yielding assets.

The yen cross is the most volatile of the three currency pairs.  Last year’s high-low spread of Y 169.98 to Y 113.94 had a width of 49.6%, and the yen rose that full span in the space of only three months between July 23rd and October 27th.  So far in 2009, the euro has been as weak as Y 112.08 and as strong as Y 137.43, a spread of 22.6%.  At the euro’s high seen earlier this month, it was still almost 10% weaker than last year’s mean of Y152.27.  The yen thrives on risk aversion caused by a severe world recession, difficult world credit conditions and high uncertainty, and it responds with greater volatility against the euro than the dollar, which also looks attractive when risk aversion spikes upward.

Because of Switzerland’s strong trade and financial ties with the countries that share the euro, Swiss officials favor a stable Swiss-euro cross-rate.  It has not been easy to deliver that goal, especially in times of dollar weakness.  In the first years of floating dollar exchange rates, the franc was the strongest major currency, and Swiss officials subordinated domestic monetary policy in their effort to cap the franc’s appreciation, imposing negative interest rates for a while.  Recently, the Swiss National Bank again elevated management of the franc to top status, warning that further appreciation against the euro will not be tolerated.  The franc had risen 15.8 from 1.6554 per euro at the start of 2008 to a high last year of 1.4301 on October 27th.  The Swiss policy shift was announced last month when the franc at 1.4580 was threatening to breach last October’s peak.  Switzerland is now in a severe recession and cannot handle the additional burden of an ever-strengthening exchange rate.  Intervention (selling francs against euros) is the favored policy tool for influencing the franc, which has traded between 1.5300 and 1.5064 per euro so far this month.  The franc’s year-to-date trading range has been 5.9%, only about 25% as wide as that for the euro’s yen cross.

Sterling was broadly weak in 2008.  The euro rose 33.5% from 0.7344 pounds at the start of the year to a high of 0.9803 very late in December.  Euroland officials have criticized their British counterparts for not taking more action to defend their currency and suspect them of passively letting it fall  so as to boost British competitiveness at the expense of Continental Europe.  The pound has performed better in 2009, recouping as much as 13.5% to a high of EUR 0.8640 in February.  At present, sterling fetches a price of 0.8916, which is 10.6% below its 2008 average value against the euro and down 17.6% on balance from last year’s high.  With a high-low range so far in 2009 that is 11.7% in width, the sterling cross continues to exhibit more volatility than the franc cross but less than the yen cross.

Euroland recorded trade surpluses last year with both Great Britain of EUR 55.4 billion and Switzerland of EUR 16.4 billion.  Compared to 2007, the surplus with the U.K. contracted 8.0%, while that with Switzerland widened 9.3%.  The trade deficit with Japan narrowed 5.8% to EUR 22.9 billion last year.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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