Exchange Rate Dynamics: The Case of US Dollar Exchange Rates Against Three Major Currencies in Asia

Abstract

With the daily exchange rate against the U.S. dollar data, we found that the volatility of the value of Chinese Yuan is smallest when compared with the Japanese yen and Korean won during the normal period, the Asian financial crisis period and the recent global financial crisis period. During the two crisis periods, we observe a higher volatility for the Korean won compared to the Japanese yen, indicating the “flight to quality.” However, the difference in the volatility is much less during the recent global financial crisis period, implying the “flight to Japanese yen” is not as prevalent as before. We also found that the difference between cross rates and direct market rates for the won/yen rate are statistically significant during the two crisis periods. Although currency speculators and arbitrageurs may find the opportunity for profit, the size of transaction cost may matter.