This weekend I got bored of cleaning some BIS banking data, so decided to play around with their foreign exchange data while watching the Cardinals beat up on the Cubs. There's less of those data, so it was easy to quickly get it cleaned and loaded into R. From there, I made the above graphs. The BIS only collects these data every three years, so the above visualizations represent the last five surveys, covering 1998-2010 (data here)*. These are bilateral ties, e.g. the USD<->EUR ties represent the nominal dollar value of all transactions between those two currencies. The thickness of the tie represents the amount of those transactions, divided by a constant (75) for all periods to make the visualization better. The size of the nodes represents the percentage of total forex transactions involving that currency.
These are quick-and-dirty. I used a simple Fruchterman-Reingold layout to emphasize centrality. Some currencies didn't exist for the whole series -- the euro in 1998; in later periods the franc, mark, ECU (XEU), and "Other EMS" which were rolled into the euro -- but I just gave them zero ties rather than spend the time to remove the actual nodes. (Hey, it's a weekend blog post.) The non-existent currencies are easy to see, as they are disconnected from the rest of the network. Just pretend they aren't there. Also, as I type this I realize that node size for "Other currencies" (Oth) is wrong because I inadvertently left some minor ones out, but the ties are correct and the node size wouldn't change by much since those are all small currencies.
Still, there's some interesting stuff to see. Most immediately obvious, the amount of foreign exchange increased noticeably from 1998-2010, as evidenced by the increasing thickness of the ties across the period. There was a 20% jump just from 2007-2010, which the BIS attributes mostly to technological improvements that lowered transaction costs and high-frequency trading.
Perhaps more surprising is the fact that the shape of the network has changed very little over the past dozen years. The US was the most central node, and the largest in 1998. The increased activity in the intervening years hasn't changed that at all. In 1998, the US was involved in 86.8% of all foreign exchange transactions**. In 2010, the number was 84.9%. The US's centrality (by this measure) peaked in 2001, when 89.9% of forex transactions involved the dollar. Similarly, despite much fanfare the euro has not moved to an especially central position. In 1998 the German mark (30.5%) and French franc (5%) were involved in 35.5% of forex transactions; in 2010 the euro (which absorbed not only the mark and france but other currencies as well) was one of the currencies traded in 39.1% of transactions. The yen decreased very slightly from 1998-2010 (21.7% to 19%), and the pound sterling increased slightly (11% to 12.9%), but in general the network changed very little. The Chinese yuan increased its share by 900% from 2004-2010... but was still on one side of less than 1% of forex transactions in 2010 (from 0.1% to 0.9%). This is shocking: despite all their growth over the past dozen years, in which their GDP has nearly quintupled, the world's second largest economy (third if we consider the eurozone as a collective, as we should for these purposes) is involved in fewer than 1/200 foreign exchange transactions. Nothing else changed much either. There are more thick ties in 2010 than there was in 1998, but all of them include the USD.
USD<->EUR transactions accounted for 28% of all transactions in 2010, close to its 2001 peak of 30%. USD<->JPY was second, with 14%. No other pair had more than 9%, and no pair that excluded USD had more than 3%. The extreme inequality in these relationships is shown by the fact that almost every currency in the network above is tied to the USD in all periods. Very few are tied to any others, short of EUR<->GBP and EUR<->JPY. China, in particular, is conspicuously weakly-tied considering the fact that it is the world's second-largest economy and it engages in so much trade.
There's been a lot of talk in recent years about a "post-American world", and the rise of a multilateral international monetary system to replace the US's "unipolar moment" in the 1990s. Several countries have spoken loudly about trying to displace the dollar as the world's reserve currency, replacing it with the IMF's SDRs or an international basket. These data indicate that such discussion may be premature. While it's possible that such a transition could happen in the future, there has been very little movement in that direction over the past dozen years. Given the fact that complex networks with an unequal topology have a habit of reinforcing themselves over time, we should qualify claims that the US dollar's role in international currency markets is in terminal decline.
*The BIS site says that there have been eight surveys, but the data I downloaded only had the five I present.
**Percentages in this paragraph, and this paragraph only, are out of 200% rather than 100% because each transaction involves a pair.
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Sunday, June 5, 2011
Posted by Kindred Winecoff at 12:02 AM . Sunday, June 5, 2011