Comparing the major euro cross rates

Here’s an unanswerable question: How will future economic historians regard those countries in Europe that chose to remain outside of the euro?

Several of the non-participants, such as Denmark and Norway, have currencies not considered to be among the “majors.” Other non-participants, principally Eastern European states such as Poland and Hungary, hope to join the club some day.

Two non-participants — the UK and Switzerland — have currencies commonly regarded as majors but have remained outside of the euro. Neither is expected to join in the foreseeable future, the British for cultural reasons and the Swiss to maintain their vaunted neutrality. Both crossrates, the British pound/euro (GBP/EUR) and Swiss franc/euro (CHF/EUR), are critical to the economic success and financial stability of both countries. A visit to either, where retail prices are posted in euros (and dollars) alongside pound and franc prices, confirms this immediately.

The consolidation of 12 currencies into the euro removed 66 different currency pairs from the interbank market. We will pass on the question of whether the world is better or worse without Finnish markka/ Portuguese escudo cross-traders, but we will note the combined absence of all these cross-rate trades did lead to a pronounced drop in global currency volatility (see “Currency trends and volatility,” Currency Trader, November 2006).

The GBP/EUR and CHF/EUR are the two principal trades remaining within the euro bloc, the currency world’s counterpoint to the U.S. dollar bloc (see “The dollar index and ‘firm’ exchange rates,” Currency Trader, December 2005). What drives them, and what information can we derive from their movements?