The euro introduction and noneuro currencies

This article documents the existence of large structural breaks in the unconditional correlations among the US dollar exchange rates of the British pound, Norwegian krone, Swedish krona, Swiss franc and euro during the period 1994 to 2003. Using the framework of Dynamic Conditional Correlation (DCC) models, we find that such breaks occurred both at the time the formal decision to proceed with the euro was made in December 1996 and at the time of the actual introduction of the euro in January 1999. Most correlations were substantially lower during the intervening period. We also find breaks in unconditional volatilities at the same points in time, but these are comparatively of a much smaller magnitude.