Exchange Rate Synchronization for a set of Currencies from Different Monetary Areas

The degree of co-movement between currencies remains an important subject for interna- tional trade and monetary integration across countries. However, the economic literature has given limited answers about the directional relationships among currencies, and whether they have a leader or a driver. Using the Hodrick-Prescott lter and the wavelet methodology, this paper analyzes exchange rate synchronization for a set of twelve currencies belonging to dierent monetary areas covering the period between January 1980 and July 2020. The empirical results reveal that: i) the U.S. dollar still plays an essential role as a foreign exchange anchor; ii) the euro shows an out-of-phase relationship with the vast majority of currencies, including with the other European currencies; iii) the British pound seems to have departed signicantly from the European single currency; iv) the Brazilian real leads the Chinese yuan for most of the sample, and both currencies record great dissimilarities with the other currencies; v) in the absence of short-term foreign exchange market frictions, average bilateral distances between currencies are smaller, and vi) during the international nancial crisis, exchange rates became more synchro- nized