Minor Currencies And Federal Reserve Trade Weights

Last month’s article “Currencies and federal reserve trade weights” (Currency Trader, July 2007), which examined major currencies’ impact on Federal Reserve trade weights, concluded: “A review of U.S. trade patterns with major currency trading partners reveals little evidence that a weaker currency leads to greater export competitiveness and a lower ability to import.” In short, the entire premise behind the floating exchange-rate regime of the past 35 years is wrong.

As all currency traders learn quickly, major currencies have different trading patterns and represent different underlying economies than minor currencies, which are buffeted more by speculative capital flows even as their markets are shallower than the majors’. Will analysis of the minors support the findings of the study of the majors, or are Federal Reserve trade weights for the minor currencies more sensitive to changes in the currencies themselves?