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How has the euro changed the foreign exchange market?

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Author Info
Harald Hau
William Killeen
Michael Moore

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Abstract

This paper examines the primary forex statistics for the euro in relation to the German mark prior to 1999. Contrary to widespread expectations, our evidence indicates that the euro lost ground against the US dollar in forex spot trading and in some dimensions does not even match the international transaction role of the German mark. We argue that the euro changed the forex market structure and particularly increased market transparency through currency elimination. The higher market transparency exposes the dealers to higher inventory risk as his inventory imbalances are revealed more easily to other dealers. Dealers in the euro markets recover increased inventory costs through higher spreads that make the euro a less attractive transaction medium than the German mark. We explore the policy implications for the ECB, for euro outsiders and reflect upon the future of the forex market. Copyright (c) CEPR, CES, MSH, 2002.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/1468-0327.00086
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Publisher Info
Article provided by CEPR, CES, MSH in its journal Economic Policy.

Volume (Year): 17 (2002)
Issue (Month): 34 (04)
Pages: 149-192
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Handle: RePEc:bla:ecpoli:v:17:y:2002:i:34:p:149-192

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  1. Hau, Harald & Massa, Massimo & Peress, Joël, 2005. "Do Demand Curves for Currencies Slope Down? Evidence from the MSCI Global Index Change," CEPR Discussion Papers 4862, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Elias Papaioannou & Richard Portes & Gregorios Siourounis, 2006. "Optimal Currency Shares in International Reserves: The Impact of the Euro and the Prospects for the Dollar," NBER Working Papers 12333, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Linda Goldberg & Cedric Tille, 2006. "The internationalization of the dollar and trade balance adjustment," Staff Reports 255, Federal Reserve Bank of New York. [Downloadable!]
  4. Harald Hau & Helene Rey, 2004. "Can Portfolio Rebalancing Explain the Dynamics of Equity Returns, Equity Flows, and Exchange Rates?," NBER Working Papers 10476, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Hau, Harald & Rey, Hélène, 2003. "Exchange Rates, Equity Prices and Capital Flows," CEPR Discussion Papers 3735, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. David W. Berger & Alain P. Chaboud & Sergey V. Chernenko & Edward Howorka & Jonathan H. Wright, 2006. "Order flow and exchange rate dynamics in electronic brokerage system data," International Finance Discussion Papers 830, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  7. Carol L. Osler, 2006. "Macro lessons from microstructure," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(1), pages 55-80. [Downloadable!]
  8. Linda S. Goldberg & Cédric Tille, 2006. "The International Role of the Dollar and Trade Balance Adjustment," NBER Working Papers 12495, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Philippe Bacchetta & Eric Van Wincoop, 2006. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," American Economic Review, American Economic Association, vol. 96(3), pages 552-576, June. [Downloadable!]
    Other versions:
  10. Jorge Pérez-Rodríguez, 2006. "The Euro and Other Major Currencies Floating Against the U.S. Dollar," Atlantic Economic Journal, International Atlantic Economic Society, vol. 34(4), pages 367-384, December. [Downloadable!] (restricted)
  11. Dick van Dijk & Haris Munandar & Christian M. Hafner, 2005. "The Euro Introduction and Non-Euro Currencies," Tinbergen Institute Discussion Papers 05-044/4, Tinbergen Institute, revised 08 Jun 2006. [Downloadable!]
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