Financial crises and dynamic linkages among international currencies

This paper investigates the interdependence of US dollar exchange rates expressed in other major currencies. Focusing on different phases of the Global financial crisis (GFC) and the Eurozone Sovereign Debt Crisis (ESDC), we adopt a dynamic conditional correlation model into a multivariate Fractionally Integrated Asymmetric Power ARCH (FIAPARCH) framework, during the period 2004–2011. The findings indicate a decrease of exchange rates correlations during the turmoil periods, suggesting the different vulnerability of the currencies. The most stable periods of the two crises for all currencies are the early phases of the GFC, while the first phase of ESDC exhibit the most cases of decreasing correlations. Finally, the Japanese yen and Swiss franc show evidence of safe heaven currencies across several phases of the two crises. The results provide crucial implications for portfolio diversification strategies and highlight the need for some form of policy coordination among central banks. © 2013 Elsevier B.V. All rights reserved.