1/13/2010  

 
   

DWARFING US CURRENCY:
WHAT’S NEXT?
Single Global Currency
IBS, HYD 
Or

Optimum Monetary Unions

SUBMITTED TO:
PROF. TRILOCHAN TRIPATHY

SUBMITTED BY (SECTION-K):
ADITYA AGARWAL 09BSHYD0036

SIDDHARTH GORAI 09BSHYD0

SHUBHANGI MITTAL 09BSHYD0797

YOGESH K. BOOLCHANDANI 09BSHYD1006

ACKNOWLEDGEMENT 
The perspicuous piece of acknowledgement provides us the opportunity to
express our profound sense of gratitude and indebtedness to our teacher Prof.
Trilochan Tripathy , Department of Economics, IBS, Hyderabad who nestled us
through the tenure of our project. Through his tremendous capacity of standing as a
stature of encouragement, enthusiasm, with a combination of intelligent grasp in
the subject, was a real thrust for guiding us to remain sincere and honest of the
subject. Our immense gratitude is too small to define his contribution. Our
indebtedness is reserved for his good will and patience during the entire period of
my research work.

Parents being earthly Gods in our life deserve much more than what we can weigh
in words. Their silent prayers, aesthetic love and affection and steely belief in our
capabilities have enabled us to make this endeavor.

Again, we iterate a word of thanks to all those hands who helped us in someway or
other in pursuing this elusive work.

ADITYA AGARWAL

SIDDHARTH GORAI

SHUBHANGI MITTAL

YOGESH BOOLCHANDANI

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TABLE OF CONTENT 
 

CONTENT PAGE NO.

Objective 4

Scope 5

History and Evolution of Money 7

Factors affecting Money in International Market 8

World Currency Timeline 10

Literature Review 12

Major Currencies of the World 17

Single Global Currency 20

Currency Map 21

Statistical Methodology 23

Results and Discussion 25

Conclusion 31

References 32

Appendix 33

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OBJECTIVE  
• To study the major currencies of the world.
• To predict the next “global currency”.
• If there is no single emerging currency can we club different currencies on the basis of
their geographical locations and see if we can go for region wise currency just like Euro
did.

Dollar $

Dominant currency Yuan ¥

Global currency

Single currency Euro €

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SCOPE OF STUDY 
The U.S. Dollar has been the dominant currency until now mainly because of the following
reasons:

• It has been a reliable store of value.

• It is the most widely accepted means of international payment for goods and services.

• Large, deep, and liquid dollar financial markets exist for savers to invest their money in.

• Political stability of the United States of America.

• A long period of dominance has allowed the currency to become a part of the
international financial trading infrastructure.

The Current Status of Dollar

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But, the changes in the global markets seem to threaten the position held by the U.S $. Some of
them are:

• Financial sector losses due to recession. It has led to a crisis of “confidence” in the
financial markets. Also, a changed attitude of the people towards risk will alter the
patterns of consumption and investment.
• The emerging currencies such as Euro and Chinese Yuan.
• The emerging economies (India, China, Brazil) with their large reserve buffers, solid
current account positions and healthier banks.
• High food and fuel prices put an enormous pressure on the world economy.

Now, its time to think whether there will be a Single Global Currency (SGC) throughout the
world or Optimum Monetary Unions. What can be the new Global Currency?

• EURO

• CHINESE YUAN

• JAPANESE YEN

• POUND STERLING and so on

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HISTORY & EVOLUTION OF MONEY IN 
INTERNATIONAL MARKET 
Before money was invented, all transactions were done through the barter system; where one
good was exchanged for another. Money first came in the form of metal coins and then evolved
into paper form. The latest addition being plastic money which is in form of various credit and
debit cards.

Money solves for basic needs which are medium, measure, standard and store.

Representative money refers to money that consists of a token or certificate made of paper. The
term 'representative money' has been used in the past to signify that a certain amount of bullion
was stored in a Treasury while the equivalent paper in circulation represented the bullion.
Representative money differs from commodity money which is actually made of some physical
commodity. Keynes distinguished between commodity money and representative money,
dividing the latter into “fiat money” and “managed money”.

Fiat money refers to money that is not backed by reserves of another commodity. The money
itself is given value by government decree, whereby debtors are legally relieved of the debt if
they pay it in the government's money. Governments through out history have often switched to
forms of fiat money in times of need such as war, sometimes by suspending the service they
provided of exchanging their money for gold, and other times by simply printing the money that
they needed. When governments produce money more rapidly than economic growth, the money
supply overtakes economic value resulting in inflation.

As trade penetrated national boundaries money of all countries started changing hands this
started the phenomena of foreign exchange. The purpose of the foreign exchange market is to
assist international trade and investment. The foreign exchange market allows businesses to
convert one currency to another.

The modern foreign exchange market started forming during the 1970s when countries gradually
switched to floating exchange rates from the previous exchange rate regime, which remained
fixed as per the Bretton Woods system.

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FACTORS AFFECTING MONEY IN 
INTERNATIONAL MARKET 
Supply and demand for any given currency, and thus its value, are not influenced by any single
element, but rather by several. These elements generally fall into three categories: economic
factors, political conditions and market psychology.

• Economic factors

* Economic policy comprises government fiscal policy (budget/spending practices) and

monetary policy (the means by which a government's central bank influences the supply
and "cost" of money, which is reflected by the level of interest rates).

* Balance of trade levels and trends: The trade flow between countries illustrates the
demand for goods and services, which in turn indicates demand for a country's currency
to conduct trade. Surpluses and deficits in trade of goods and services reflect the
competitiveness of a nation's economy. For example, trade deficits may have a negative
impact on a nation's currency.

* Inflation levels and trends: Typically a currency will lose value if there is a high level
of inflation in the country or if inflation levels are perceived to be rising. This is because
inflation erodes purchasing power, thus demand, for that particular currency. However, a
currency may sometimes strengthen when inflation rises because of expectations that the
central bank will raise short-term interest rates to combat rising inflation.

* Economic growth and health: Reports such as GDP, employment levels, retail sales,
capacity utilization and others, detail the levels of a country's economic growth and
health. Generally, the more healthy and robust a country's economy, the better its
currency will perform, and the more demand for it there will be.

• Political conditions

Internal, regional, and international political conditions and events can have a profound
effect on currency markets. All exchange rates are susceptible to political instability and
anticipations about the new ruling party. Political upheaval and instability can have a

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 negative impact on a nation's economy. For example, destabilization of coalition
governments in Pakistan and Thailand can negatively affect the value of their currencies.
Also, events in one country in a region may spur positive/negative interest in a
neighboring country and, in the process, affect its currency.

• Market psychology

Market psychology and trader perceptions influence the foreign exchange market in a
variety of ways:

* Flights to quality: Unsettling international events can lead to a "flight to quality," with
investors seeking a "safe haven." There will be a greater demand, thus a higher price, for
currencies perceived as stronger over their relatively weaker counterparts. The Swiss
franc and gold have been traditional safe havens during times of political or economic
uncertainty.

* Long-term trends: Currency markets often move in visible long-term trends. Although
currencies do not have an annual growing season like physical commodities, business
cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may
rise from economic or political trends.

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WORLD CURRENCY TIMELINE 
Since the mid-20th century, the de facto world currency has been the United States dollar.
According to Robert Gilpin in Global Political Economy: Understanding the International
Economic Order (2001): "Somewhere between 40 and 60 percent of international financial
transactions are denominated in dollars. For decades the dollar has also been the world's
principal reserve currency; in 1996, the dollar accounted for approximately two-thirds of the
world's foreign exchange reserves".

Since 1999, the dollar's dominance has begun to be eroded by the euro, which represents a larger
size economy, and has the prospect of more countries adopting the euro as their national
currency.

Major Currencies dominating the world prior to US Dollar:

• 17th-19th century: (Spanish Dollar)

In the 17th and 18th century, the use of silver Spanish dollars or "pieces of eight" spread
from the Spanish territories in the West America to Asia and eastwards to Europe
forming the first ever worldwide currency. Spain's political supremacy on the world
stage, the importance of Spanish commercial routes across the Atlantic and the Pacific,
and the coin's quality and purity of silver helped it become internationally accepted for
over two centuries. It was legal tender in Spain's Pacific territories of the Philippines,
Micronesia, Guam and the Caroline Islands and later in China and other Southeast Asian
countries until the mid 19th century. In the Americas it was legal tender in all of South
and Central America as well as in the U.S. and Canada until the mid-19th century.

• 19th - 20th century

Prior to and during most of the 1800s, international trade was denominated in terms of
currencies that represented weights of gold. Most national currencies at the time were in
essence merely different ways of measuring gold weights. Hence some assert that gold
was the world's first global currency. The emerging collapse of the international gold
standard around the time of World War I had significant implications for global trade.

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 • Bretton Woods System,1944

In the period following the Bretton Woods Conference of 1944, exchange rates around
the world were pegged against the United States dollar, which could be exchanged for a
fixed amount of gold. This reinforced the dominance of the US dollar as a global
currency. However, as the United States remained the world's preeminent economic
superpower, most international transactions continued to be conducted with the United
States Dollar.

• The Plaza Accord, 1985

The Plaza Accord or Plaza Agreement was an agreement between the governments of
France, West Germany, Japan, the United States, and the United Kingdom, to depreciate
the U.S. dollar in relation to the Japanese yen and German Deutsche Mark by intervening
in currency markets. The five governments signed the accord on September 22, 1985 at
the Plaza Hotel in New York City. The exchange rate value of the dollar versus the yen
declined by 51% from 1985 to 1987.

The reason for the dollar's devaluation was two fold: to reduce the U.S. current account
deficit, which had reached 3.5% of the GDP, and to help the U.S. economy to emerge
from a serious recession that began in the early 1980s. Devaluing the dollar made U.S.
exports cheaper to its trading partners, which in turn meant that other countries bought
more American-made goods and services.

• The Louvre Accord, 1987

The Louvre Accord was signed in 1987 to halt the continuing decline of the U.S. dollar.
The Louvre Accord was signed by the then G6 (France, West Germany, Japan, Canada,
the United States and the United Kingdom) on February 22, 1987 in Paris, France. The
goal of the Louvre Accord was to stabilize the international currency markets and halt the
continued decline of the US Dollar caused by the Plaza Accord whose primary aim was
depreciation of the US dollar in relation to the Japanese yen and German Deutsche Mark
by mutual agreement.

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LITERATURE REVIEW 

[1] “The U.S. dollar will continue to be the dominant international currency.”
EDWIN M. TRUMAN Senior Fellow, Peterson Institute for International Economics

The U.S. dollar will continue to be the dominant international currency in ten years. It is still the
only true international currency; that is one that is used by parties that do not include U.S.
residents. Do you see euro- denominated bonds issued in New York as dollar-denominated bonds
are issued in London? Looking just at reserve holdings and considering only developing
countries as the most relevant group, it is true that since the first quarter of 1999, the dollar’s
share has declined 10.6 percentage points in value terms, but in quantity terms the decline has
been only 6.8 percentage points and the dollar’s decline was at a faster pace before the dollar’s
peak in the first quarter of 2002 than since then. The dollar’s quantity share in the reserves of
developing countries is currently 38.5 percentage points ahead of the euro. At the recent pace of
adjustment which has slowed since early 2002 during a period of substantial dollar depreciation,
it would take the euro twenty-four years to catch the dollar and in ten years it would still be more
than 15 percentage points behind.

[2] “The dollar now, in fifty years the Yuan”

DINO KOS Managing Director and Head of Central Banks and Sovereign Wealth Funds, New York

The U.S. dollar will remain the primary reserve currency ten years from now. Over a longer time
horizon, say thirty or forty years, the next great currency—barring calamitous policy missteps—
will be the Chinese Yuan. The longer period will be required to liberalize the Chinese economy,
build up efficient money and capital markets, and foster the deep and liquid markets consistent
with reserve currency status.

[3] “Both the dollar and the euro.”

BARRY EICHENGREEN Professor of Economics, University of California, Berkeley

International currency status is not a winner take- all game. Only in exceptional periods like the
era of U.S. economic hegemony after World War II, when only the United States had deep and
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liquid financial markets open to the rest of the world, has a single currency dominated
international transactions. To be sure, incumbency is an advantage—in politics and in the
competition for global currency status alike. But ten years from now is not too soon to imagine a
situation where the dollar and the euro play roughly comparable global roles. My choice,
therefore, is both the dollar and the euro, which are likely to cohabit through the first half of the
twenty-first century, after which they may be challenged by the Yuan.

[4] “The dollar is currently weak because of major blunders by the Fed.”
STEVE FORBES President and CEO, Forbes Inc

The dollar will be the great global currency ten years from now. It is currently weak because of
major blunders by the Federal Reserve, which has been printing too many greenbacks since
2004. That excessive money-making is why all commodities have surged. In mid-2003 oil was
selling at around $25 a barrel. Even with India, China, and central and eastern Europe booming
and even with political turmoil in the Middle East, Venezuela, and Nigeria, there is no way the
real price of oil and most other commodities should have almost quadrupled. The political fallout
from rising inflation will force the Fed and the next president to re-stabilize the beleaguered
buck. Then, the dollar will again be king and all the talk of the need to diversify reserves into
other currencies will fade away. In the meantime, though, the world will experience the
unpleasant consequences, politically and economically, of the Fed’s mistakes.

[5] “The dollar now, the Yuan in thirty.”

MARC LELAND Former Assistant Secretary for International Affairs, U.S. Treasury

The dollar will have problems. The euro will play a more important role but the dollar will still
be the major world currency—not the “great global currency” but greater than any other. If you
asked me to predict for thirty years from now, I might lean toward the Yuan.

[6] “All the options are possibilities!”

JIM O’NEILL Head of Global Economic Research, Goldman Sachs International

All the options are possibilities! As someone who has been quite negative on the dollar for the
past decade, it is obviously tempting to conclude that the dollar will be “down and out” and it
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will lose its predominant reserve currency status. However, many of the factors that have
plagued the United States and the challenges facing the dollar are starting to improve, so I think
it is dangerous to write off the buck, especially when we read about rapper Jay-Z and model
Giselle Bündchen both wanting the euro. If the desire for the euro has spread that far, then
perhaps there is no one else left to buy it! Amongst other currencies, clearly the euro has already
grown in importance, and it seems pretty inevitable that Chinese Yuan usage is on the rise. So I
suspect the future will bring something between “some formal or informal currency bloc” and
“foreign exchange chaos.” As a friend of the active investor, I sincerely hope the latter, or
something close to it.

We are in an era of significant relative change. As I have written for years, there is dramatic need
for major reform of the International Monetary Fund, the World Bank, the G7 and the
G8. If we get dramatic reform in the next ten years, then perhaps a more stable foreign exchange
environment might emerge, but without that relatively simple observable need to be fulfilled,
why would anyone expect stability?

[7] “In ten years, we may see only 70 percent for the dollar and 45 percent for
the euro.”
HORST SIEBERT President-Emeritus, Kiel Institute for the World Economy, and Heinz Nixdorf
Professor in European Integration and Economic Policy, Johns Hopkins University, SAIS Bologna Center

The U.S. dollar will continue to be the major global currency, but it will lose relative weight. In
2007, 86 percent of the total transactions in the international currency markets had the U.S.
dollar on one side of the transaction and 37 percent the euro (yen and sterling 17 percent and 15
percent, respectively). Note that the sum of the percentage shares totals 200 since two currencies
are involved in each transaction. In ten years, we may see only 70 percent for the dollar and 45
percent for the euro. Total reserve holdings of all central banks, 65 percent in U.S. dollars in
2007, are likely to be reduced relatively more, maybe down to 45–50 percent. This development
will reflect the reduction of the U.S. share in global GDP from 27 percent today; it will mirror
the geopolitical shift in favor of Asia. Together with the share of trade and capital flows, a high
share of world output is one factor determining whether a currency plays the role of the leading

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currency. Another important condition is that the currency is stable. If the U.S. Federal Reserve
follows an expansionist and inflationary line, if the stability of the U.S. banking industry is not a
given, and if the long run is neglected by American consumers and American politics, the role of
the U.S. dollar will decline more.

[8] “The alternatives will be limited.”

WILLIAM H. OVERHOLT Director, RAND Center for Asia Pacific Policy

The dollar will remain the most important global currency. It may well be considerably less
attractive and less unique as a reserve and trade-denomination currency than today, but the
alternatives will be limited. The European Central Bank may acquire a crisis-management
capability that is currently unique to the Fed, but the euro will just be finishing its transition from
today’s collection of limited puddles of liquidity to becoming a deep sea of liquidity like the
dollar. The Japanese economy will be a far smaller proportion of the global economy than today,
since everyone else is growing faster, and it would take major changes in Japanese currency
management style for other countries to want the yen as a predominant reserve.

The Chinese Yuan will probably be fully convertible by then, but its banking system and
regulators won’t be ready for the reserve role. The other major players are unlikely to trust Bank
of Japan or People’s Bank for crisis management as much as they trust the Fed and,
prospectively, the European Central Bank. So reserves and trade will be more diversified but the
dollar will be most important. A unified Asian currency remains a fantasy. Finally, future U.S.
administrations may have sounder policies than the current one.

[9] “We are at the dawn of the age of the bipolar currencies.”
MAKOTO UTSUMI President and CEO, Japan Credit Rating Agency, Ltd., and former Vice Minister of
Finance for International Affairs, Japan

While the euro has been establishing itself already a key currency rivaling the U.S. dollar, it is
still lagging behind the U.S. dollar as a reserve currency, a settlement currency, and an invoicing
currency. It might not take a decade for the euro to rank with the U.S. dollar. We are at the dawn
of the age of the bipolar currencies.

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[10] “The Yuan, propelled by China’s sustained prominence in international
trade and investment.”
CHARLES WOLF, JR. Senior Economic Adviser and Corporate Chair in International Economics and
Professor, Rand Graduate School of Policy Studies

I take as a premise that a “great world currency” is one that, for a combination of precautionary
and transactional motives, constitutes a large part of the foreign reserves by their principal
holders including central banks, corporations, and others. Currencies that qualify will tend to be
closely, though not perfectly, correlated, with those predominating in international trade and
investment transactions. The dollar has been and is the principal great world currency.
Approximately two-thirds of foreign reserves are currently held in dollars, with the remainder
consisting of Euros, sterling, and yen. The dollar proportion has decreased in recent years by
perhaps 10 percent, with most of the corresponding increase registered in Euros. By 2018, I’d
expect the dollar’s share to decline perhaps a further 5 or 10 percent. The next great world
currency whose holdings will rise to absorb some of the U.S. decrease is likely to be the Yuan,
propelled by China’s sustained prominence in international trade and investment. This prognosis
presumes that within this time period, the Yuan will have become fully convertible on capital
account, as it already is on its current account. The additional great world currency is both a
reflection of, and a contributor to, the so-called multi-polarity in international affairs.

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THE MAJOR CURRENCIES OF THE WORLD 
[1] US DOLLAR
The United States dollar (sign: $; code: USD) is the unit of currency of the United States.

The U.S. dollar is the currency most used in international transactions. Several countries use it as
their official currency, and in many others it is the de facto currency.

The dollar is also used as the standard unit of currency in international markets for commodities
such as gold and petroleum (the latter sometimes called petrocurrency is the source of the
term petrodollar). Some non-U.S. companies dealing in globalized markets, such as Airbus, list
their prices in dollars.

At the present time, the U.S. dollar remains the world's foremost reserve currency. In addition to
holdings by central banks and other institutions there are many private holdings which are
believed to be mostly in $100 denominations. The majority of U.S. notes are actually held
outside the United States. All holdings of US dollar bank deposits held by non-residents of the
US are known as euro-dollars (not to be confused with the euro) regardless of the location of the
bank holding the deposit (which may be inside or outside the U.S.)

The dollar as international reserve currency

Percentage of global currencies

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[2] EURO
The Euro (€) is the official currency of the European Union, and is currently in use in 16 of the
27 Member States. The states, known collectively as the Euro zone,
are Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, M
alta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. The currency is also used in a
further five European countries, with and without formal agreements, and is consequently used
daily by some 327 million Europeans. Over 175 million people worldwide use currencies which
are pegged to the euro, including more than 150 million people in Africa.

The euro is the second largest reserve currency and the second most traded currency in the world
after the U.S. dollar. As of October 2009, with more than €790 billion in circulation, the euro is
the currency with the highest combined value of banknotes and coins in circulation in the world,
having surpassed the U.S. dollar. Based on IMF estimates of 2008 GDP and purchasing power
parity among the various currencies, the Euro zone is the second largest economy in the world.

The name euro was officially adopted on 16 December 1995. The euro was introduced to world
financial markets as an accounting currency on 1 January 1999, replacing the former European
Currency Unit (ECU) at a ratio of 1:1. Euro coins and banknotes entered circulation on 1 January
2002. On 1 December 2009 the Treaty of Lisbon entered into force, and with it the euro became
the official currency of the European Union.

[3] JAPANESE YEN

The Yen (sign: ¥; code: JPY) is the currency of Japan. It is the third most-traded currency in
the foreign exchange market after United States dollar and the euro. It is also widely used as
a reserve currency after the U.S. dollar, the euro and the pound sterling.

The yen lost most of its value during and after World War II. After a period of instability, in
1949, the value of the yen was fixed at ¥360 per US$1 through a United States plan, which was
part of the Bretton Woods System, to stabilize prices in the Japanese economy. That exchange
rate was maintained until 1971, when the United States abandoned the gold standard, which had
been a key element of the Bretton Woods System, and imposed a 10 percent
surcharge on imports, setting in motion changes that eventually led to floating exchange rates in
1973.
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By 1971 the yen had become undervalued. Japanese exports were costing too little in
international markets, and imports from abroad were costing the Japanese too much. This
undervaluation was reflected in the current account balance, which had risen from the deficits of
the early 1960s to a then-large surplus of U.S. $5.8 billion in 1971. The belief that the yen, and
several other major currencies, were undervalued motivated the United States' actions in 1971.

Following the United States' measures to devalue the dollar in the summer of 1971, the Japanese
government agreed to a new, fixed exchange rate as part of the Smithsonian Agreement, signed
at the end of the year. This agreement set the exchange rate at ¥308 per US$1. However, the new
fixed rates of the Smithsonian Agreement were difficult to maintain in the face of supply and
demand pressures in the foreign-exchange market. In early 1973, the rates were abandoned, and
the major nations of the world allowed their currencies to float.

[4] CHINESE YUAN

The yuan (sign: 元; code: CNY) is, in the Chinese language, the base unit of a number of
modern Chinese currencies.

One yuan is divided into 10 jiao (角) or colloquially "feathers" (mao) (毛). One jiao is divided
into 10 fen ( 分 ). In Cantonese, widely spoken in Guangdong, Hong
Kongand Macau, jiao and fen are called ho (毫 ) and sin ( 仙). "Sin" is a word borrowed into
Cantonese from the English "cent".

The symbol for the yuan ( 元 ) is also used to refer to the cognate currency units
of Japan and Korea, and is used to translate the currency unit dollar; for example, the US
dollar is called Meiyuan (美元), or American yuan, in Chinese.

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SINGLE GLOBAL CURRENCY (SGC) 
Single Global Currency will be a common currency, which will be regulated by Global Central
Bank. People can use this currency within member countries as legal tender and for international
transactions.

• WHO WILL BENEFIT FROM HAVING A ‘SGC’?

EVERYONE in the world including;

• Corporations

• Travelers

• Individuals Purchasing/Selling Anything In Global Economy (Almost Everyone)

• People Living In Countries Where Currency Values Fluctuate (Everyone, In Brief)

• People In Countries Subject To Currency Crashes

EXCEPT for those who make their living or

• Fortune From The Existing System

• Currency Traders

• Currency Speculators

• Hedgers Against Currency Risk

• OTHER ADVANTAGES

• Eliminate $400 billion annual FX transaction costs

• Eliminate global (currency) imbalances

• Eliminate need for FX reserves

• Eliminate currency fluctuations

• Reduce worldwide interest rates

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CURRENCY MAP 

CURRENT CURRENCY DISTRIBUTION VIEW

 
 

FUTURISTIC SINGLE CURRENCY DISTRIBUTION VIEW

 
 
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 OPTIMUM MONETARY UNIONS & CURRENCY DISTRIBUTION VIEW

 
 

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STATISTICAL METHODOLOGY 
At present there are around 145 currencies prevalent throughout the world. These currencies
facilitate trade and commerce across geographical boundaries but on the negative side it also
leads to a loss of whooping 400 billion USD as a transaction cost.

As already discussed in project there is very negligence chance of a single global currency which
can dethrone the mighty dollar. The reasons being

• Political Conditions
• Economic Differences
• Socio-cultural Differences

But many economists are also in view of developing a currency based on geographical proximity
like countries of South Asia can come together to form a common currency like Euro or
countries of Africa or Middle East come together and form a more dominant and stable currency.

In our model we have taken 29 currencies of the world and studied their exchange rate in context
of Indian Rupees. Then we run co-relation and see that to what extent these currencies are
correlated to each other and we also run cluster analysis and see whether these currencies fall
into clusters which can be clubbed together to form a stable currency.

Data for the currencies exchange rate has been collected from ratefx.com and for the co-relation
analysis and cluster analysis we will be using SPSS 13.0 software.

In the cluster analysis, we have used the K-MEAN CLUSTER ANALYSIS, where in we have
pre-determined the number of clusters i.e. K=4. It was because if we go for more number of
clusters then independent clusters would emerge and the effect would not be studied properly.

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In our study we have taken 29 different currencies of the world-

S.No. COUNTRY CONTINENT CURRENCY

1 AUSTRALIA AUSTRALIA AUSTRALIAN DOLLAR

2 BRAZIL SOUTH AMERICA BRAZILAIN REAL
3 BRITISH POUND EUROPE GREAT BRITIAN POUND
4 CANADA NORTH AMERICA CANADIAN DOLLAR
5 CHILE SOUTH AMERICA CHILEAN PESO
6 CHINA ASIA CHINESE YUAN
7 CZECH REPUBLIC EUROPE CZECH KROUNA
8 DENMARK EUROPE DANISH KRONE
9 EUROPEAN UNION EUROPE EURO
10 HONG KONG ASIA HONG KONG DOLLAR
11 HUNGARY EUROPE HUNGRIAN FRONT
12 INDONESIA ASIA INDONESIAN RUPIAH
13 ISREAL ASIA ISRAELI SHEKEL
14 JAPAN ASIA JAPENESE YEN
15 MALASIYA ASIA MALASYIAN RINGGIT
16 MEXICO SOUTH AMERICA MEXICAN PESO
17 NEWZELAND AUSTRALIA NEWZELAND PESO
18 NORWAY EUROPE NORWEGIAN KRONE
19 POLAND EUROPE POLISH ZLOTY
20 SAUDI ARAB ASIA SAUDI RIYAL
21 SINGAPORE ASIA SINGAPORE DOLLAR
22 SOUTH AFRICA AFRICA SOUTH AFRICAN RAND
23 SOUTH KOREA ASIA SOUTH KOREAN WON
24 SWEDEN EUROPE SWEISH KRONE
25 SWITZERLAND EUROPE SWISS FRANC
26 TAIWAN ASIA TAIWAN NEW DOLLAR
27 THILAND ASIA THAI BHAT
28 TURKEY ASIA TURKISH LIRA
29 UNITED STATES OF NORTH AMERICA US DOLLAR
AMERICA
 

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RESULTS AND DISCUSSION 
CLUSTER ANALYSIS

We divided our currencies into 2 groups one having all 29 currencies under study and one group
having 10 major currencies of the world. Both these groups were subjected to cluster analysis
using SPSS 13.0 software and the results are as follows:

1) All 29 currencies into 4 clusters:

From the table generated by the software we could clearly see Cluster 1 contains 2
countries form Asia and one from S.America. Cluster 2 contains 4 from Asia and 1 form
1 from Europe. Cluster 3 contains 4 from Asia and one from N.America, and last cluster
which forms the largest contains largest number of currencies has 7 countries from
Europe, 2 countries from Asia, 2 from Australia, 2 from S. America and one each form
N.America and Africa. This is highly fragmented result since according to cluster it
contains many such countries which are very far geographically, socially, culturally and
economically too, so this model fails to explain or predict our underlying objective that
weather we can club together the currencies of those countries which are located besides
each other so that it promotes trade and commerce within the region and also saves the
transaction costs.

Final Cluster Centers

Cluster

1 2 3 4
AFRICA 5.646416 6.120340 4.918953 6.255982
AUSTRALIA 36.400409 39.743354 32.401503 42.307089
BRITAIN 74.449733 79.519035 70.827915 76.238917
CANADA 41.521009 43.642047 39.654388 44.224793
CHINA 7.202913 7.076507 7.268197 6.848845
EURO 66.424214 68.596362 63.970439 68.971517
JAPAN .503981 .511807 .534201 .519418
NEWZEALAND 28.989720 32.001932 25.808429 34.000150
SWITZERLAND 43.834047 45.141521 42.907020 45.718492
US DOLLAR 49.1899 48.3467 49.6921 46.7624
BRAZILIAN REAL 23.152015 25.559981 21.336434 26.759672

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 CHILEAN PESO .085797 .088774 .081768 .089916
CZECH KORUNA 2.478432 2.663929 2.300165 2.667297
DANISH KRONE 8.917135 9.219829 8.594700 9.257636
HONGKONG DOLLAR 6.341912 6.238631 6.411193 6.028986
HUNGARIAN FORINT .229519 .251830 .216412 .254567
INDONESIAN FORINT .00458 .00480 .00425 .00493
IZRAEL SHEKEL 11.999463 12.531085 12.197717 12.429694
MALAYSIAN RINGETT 13.781473 13.707381 13.650865 13.708300
MEXICAN PESO 3.6537 3.6500 3.4242 3.5713
NORWARIAN KRONE 7.543341 7.797673 7.195220 8.200975
POLISH ZLOTY 14.901054 16.166476 14.103059 16.522915
SAUDI RIYAL 13.106686 12.893779 13.260485 12.461402
SINGAPORE DOLLAR 33.15974 33.47605 32.74386 33.45187
SOUTH KOREAN WON .037830 .038669 .034637 .039969
SWEDISH KRONA 6.163844 6.516025 5.836264 6.681239
TAIWAN NEW DOLLAR 1.477999 1.472086 1.456348 1.447857
THAI BHAT 1.406126 1.420462 1.405425 1.401874
TURKISH LIRA 30.918142 32.035352 29.678795 31.395090

Consolidated Output

CLUSTER 1  CLUSTER 2  CLUSTER 3  CLUSTER 4 

Currency  Continent  Currency  Continent Currency  Continent  Currency  Continent 
MALAYSIAN  POLISH  CHINESE  SOUTH AFRICAN 
RINGGNT  ASIA  ZLOTY  EUROPE  YUAN  ASIA  RAND  AFRICA 
MEXICAN  ISREALI  JAPANESE 
PESO  S.AMERICA  SHEKEL  ASIA  YEN  ASIA  AUSTRALIANDOLLAR  AUSTRALIA 
TIWAN 
NEW  SINGAPORE  US 
DOLLAR  ASIA  DOLLAR  ASIA  DOLLAR  N.AMERICA  CANADIAN DOLLAR  N.AMERICA 
HONG 
  
KONG 
  
THAI BHAT  ASIA  DOLLAR  ASIA  EURO  EUROPE 
  
TURKISH  SAUDI  NEWZELAND 
  
LERA  ASIA  RIYAL  ASIA  DOLLAR  AUSTRALIA 
  
   BRAZILIAN REAL  S.AMERICA 
  
CHILEAN PESO  S.AMERICA 
  
   CZECH KROUNA  EUROPE 

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DANISH KRONE  EUROPE 
  
   HUNGRIAN FRONT  EUROPE 
   INDONESIAN 
   DOLLAR  ASIA 
  
NORWEGIAN KRONE  EUROPE 
  
SOUTH KOREAN 
  
WON  ASIA 
  
  
  
  
  
  
   SWEISH KRONE  EUROPE 

2) 10 major currencies into 4 clusters:

Once all 29 currencies failed to give a clear picture of weather we can club currencies on
basis of their region we switched to 10 major currencies of the world and tried to see it
we can club them by the same logic. The table generated gave the following picture.
Cluster 1 contained 1 currency from Europe. Cluster 2 contained 2 currencies from
Europe, 2 from Australia, and one currency each form N.America and Africa. Cluster 3
contains only one currency from N.America, and cluster 4 contains 2 currencies and that
too from Asia. Though this analysis also doesn’t give clear picture as to whether we can
club the currencies according to geographical basis but certainly this is a better fit than
model comprising all 29 currencies. Cluster 1,3 and 4 gives us clear picture that
currencies from China and Japan can be clubbed together and as these both are Asian
countries we can certainly look forward into this direction. Cluster 1 and 3 also tells us
that Great Britain Pound and US Dollar can’t be clubbed together with anyone. Cluster 2
contains currencies from every continent which again can’t be clubbed together because
of the reasons discussed above.

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 Final Cluster Centers

Cluster

1 2 3 4
AFRICA
6.023237 6.271914 4.903050 5.570748
AUSTRALIA
39.058710 42.122385 32.273409 35.983129
BRITAIN
79.078990 76.815844 70.711594 73.847658
CANADA
43.180025 44.326921 39.586375 41.268138
CHINA
7.040763 6.894348 7.253960 7.260318
EURO
67.868224 69.116195 63.745050 66.424826
JAPAN
.504945 .520056 .534747 .507894
NEWZEALAND
31.280032 33.920837 25.657500 28.719982
SWITZERLAND
44.669542 45.786571 42.843890 43.805462
US DOLLAR
48.1088 47.0756 49.5966 49.5796

Consolidated Result

CLUSTER 1  CLUSTER 2  CLUSTER 3  CLUSTER 4 

Currency  Continent  Currency  Continent  Currency Continent  Currency  Continent 

GREAT  SOUTH 
BRITAIN   AFRICAN  U S 
POUND  EUROPE  RAND  AFRICA  DOLLAR  N.AMERICA CHINA  ASIA 
AUSTRALIAN 
DOLLAR  AUSTRALIA  JAPAN  ASIA 
     
   CANADIAN    
   DOLLAR  N.AMERICA      
        
   EURO  EUROPE       
        
   NEWZELAND       
   DOLLAR  AUSTRALIA       
   SWISS       
   FRANC  EUROPE       
 

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CO-RELATION

Co-relation co-efficient matrix shows the co-relation between various variables. Here, we try to figure out
the co-relation between various emerging and dominant currencies in the world. The objective to do so is
to see whether we can club the similar trend depicting currencies together or not. Also, another reason for
doing so is to find out whether the currencies can be clubbed together on the basis of the relationship
strength between them.

Here, the strength of relationship could be either positive or negative. Positive correlated currencies mean
that there is same direction of appreciation or depreciation of currencies correlated.

The result does not actually support the justified clubbing of the currencies as the reason could be that the
exchange rate is not the only factor to decide upon the currency clubbing.

Correlations
NEWZ US
AFR AUSTR BRIT CANA EALAN SWITZE DOLL
ICA ALIA AIN DA CHINA EURO JAPAN D RLAND AR
AFRICA Pearson -
.797(* -
Correlation 1 .951(**) .934(**) .850(**) -.316(**) .942(**) .825(**) .648(*
*) .640(**)
*)
Sig. (2-
tailed) .000 .000 .000 .000 .000 .000 .000 .000 .000

N
258 258 258 258 258 258 258 258 258 258

AUSTR Pearson -
.951(** .725(* -
ALIA Correlation 1 .946(**) .864(**) -.228(**) .988(**) .866(**) .740(*
) *) .735(**)
*)
Sig. (2-
tailed) .000 .000 .000 .000 .000 .000 .000 .000 .000

N
258 258 258 258 258 258 258 258 258 258

BRITAI Pearson -
.797(** -
N Correlation .725(**) 1 .766(**) .784(**) -.358(**) .721(**) .713(**) .360(*
) .357(**)
*)
Sig. (2-
.000 .000 .000 .000 .000 .000 .000 .000 .000
tailed)

N
258 258 258 258 258 258 258 258 258 258

CANAD Pearson -
.934(** .766(* -
A Correlation .946(**) 1 .846(**) -.228(**) .942(**) .843(**) .658(*
) *) .652(**)
*)
Sig. (2-
.000 .000 .000 .000 .000 .000 .000 .000 .000
tailed)
258 258 258 258 258 258 258 258 258 258
N

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 CHINA Pearson - -
- - 1.000(
Correlation .640(** -.735(**) .357(* 1 -.389(**) .181(**) -.417(**)
.652(**) .704(**) **)
) *)
Sig. (2-
.000 .000 .000 .000 .000 .004 .000 .000 .000
tailed)

N
258 258 258 258 258 258 258 258 258 258

EURO Pearson -
.850(** .784(* -
Correlation .864(**) .846(**) 1 -.073 .886(**) .962(**) .395(*
) *) .389(**)
*)
Sig. (2-
.000 .000 .000 .000 .000 .243 .000 .000 .000
tailed)

N
258 258 258 258 258 258 258 258 258 258

JAPAN Pearson
- -
Correlation - - .183(*
.316(** -.228(**) .358(* .181(**) -.073 1 .031
.228(**) .184(**) *)
) *)
Sig. (2-
.000 .000 .000 .000 .004 .243 .003 .625 .003
tailed)

N
258 258 258 258 258 258 258 258 258 258

NEWZE Pearson -
.942(** .721(* -
ALAND Correlation .988(**) .942(**) .886(**) -.184(**) 1 .884(**) .709(*
) *) .704(**)
*)
Sig. (2-
.000 .000 .000 .000 .000 .000 .003 .000 .000
tailed)

N
258 258 258 258 258 258 258 258 258 258

SWITZ Pearson -
.825(** .713(* -
ERLAN Correlation .866(**) .843(**) .962(**) .031 .884(**) 1 .423(*
) *) .417(**)
D *)
Sig. (2-
.000 .000 .000 .000 .000 .000 .625 .000 .000
tailed)

N
258 258 258 258 258 258 258 258 258 258

US Pearson - -
- 1.000(* -
DOLLA Correlation .648(** -.740(**) .360(* -.395(**) .183(**) -.423(**) 1
.658(**) *) .709(**)
R ) *)
Sig. (2-
.000 .000 .000 .000 .000 .000 .003 .000 .000
tailed)
258 258 258 258 258 258 258 258 258 258
N
** Correlation is significant at the 0.01 level (2-tailed).

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CONCLUSION 
So, who will be the next global currency, whether there will be a single global currency or
currencies like Euro will emerge which will be based on geographical locations. The
speculations about the Euro or Yuan being next global currencies are very high but the reality is
they are still in very nascent stage of their development.

No doubt looking at current scenario we can say that USD is taking pounding from every corner
but we can’t just write it off, only time and future economic development will tell that who will
emerge as a winner or there will be few regional currencies that will enhance trade and
commerce within that region.

• While developing a model, based on exchange rate we tried to see if we can club together
various currencies on basis of their geographical location, so that these can be clubbed
together to form a common currency in near future, but our analysis shows that based
only upon exchange rate we cannot say with significant confidence that whether we can
club certain currencies to form a common currency, the reason can be attributed to the
fact that there are various other factors major being economic and political.

• Future course if action could be to include various other parameters in this model and see
if we can get some significant cluster of currencies that can be clubbed together, the
factors could be Foreign Exchange Reserve, Contribution towards total global trade,
Stability, etc. all these factors would help us to get deep insight in developing a robust
and reliable model.

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REFERENCES 
[1] http://www.ratefx.com

[2] http://en.wikipedia.org/wiki/History_of_money

[3] http://en.wikipedia.org/wiki/Foreign_exchange_market

[4] http://en.wikipedia.org/wiki/Plaza_Accord

[5] http://en.wikipedia.org/wiki/Louvre_Accord

[6] The magazine of International Monetary Policy Spring 2008 (Pg22-Pg38)

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