One of the lessons of the floating exchange regime was that constant currency volatility raised the cost of doing business internationally. Hedging is expensive when done correctly and is even more expensive when done incorrectly. Worse, the chief selling point for floating exchange rates — self correcting trade balances — never came to pass.
The world has been taking large steps to move away from free-floating currencies. The Euro is nothing more than a repudiation of the constant currency volatility of the 80s and early 90s. Japan has moved to peg the yen to the dollar and in doing so has succeeded in keeping U.S. capital rates low even though the Federal Reserve has raised short-term interest rates. These are economic benefits of the first order.
The result has been a world looking ever more like the DXY: The dollar plus the CAD and JPY on one side, and the Euro and its proxies on the other. This suggests the single trading instrument of the DXY will grow to be the most useful single measure of the currency exchange volatility between the dollar and Euro in our new firm exchange-rate world.
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