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Are Reserve Currencies Overvalued?

A new report from the Bank for International Settlements suggests that nearly all reserve currencies may be poised to depreciate.

In the mood for a little light reading? How about the latest quarterly report from the Bank for International Settlements? Right. Well, good thing we have this interesting summary and analysis to get us through.

The BIS examined the relationship between foreign-exchange turnover and per capita income, and found that the richer the country, the greater the turnover in their currency. In fact, they were able to fit most of the data along a pretty neat regression line, suggesting that there is a relatively consistent relationship between forex turnover, trade, and GDP per capita.

So who were the outliers? You guessed it: the U.S., Japan, Great Britain, Australia, and a few others have far more forex turnover than their trade and GDP would suggest. China, on the other hand, had turnover well below what its fundamental economic activity would suggest.

"One interpretation of this analysis is that demand for the all of the currencies that fall above the regression line should decline over time, and should experience at least some depreciation," the analysis found. "The opposite can be said for currencies that currently fall the regression line, especially if their economies continue to expand at a faster-than average pace."

Not exactly short-term trading recommendations, but definitely food for thought.

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