Dynamic interdependence of major currencies and the US dollar: a wavelet coherence approach

Abstract This research employs a wavelet coherence technique to analyze the dynamic inter-connectedness between the US dollar and five major global currencies: Japanese Yen, Canadian Dollar, Euro, British Pound, and Australian Dollar. Daily frequency data from 01/01/2/2019 to 30/08/2024 are used. These currencies are highly correlated and integrated over the long run. The British Pound and Australian Dollar sometimes lead global currency markets despite the US dollar’s dominance. These findings contradict that the US dollar dominates and show that global currency connections are reciprocal. Safe-haven currencies like the Japanese Yen have more significant negative correlations with the US dollar during economic instability, giving investors hedging possibilities. The research shows how macroeconomic variables and global market circumstances shape currency interdependencies and provides insights for investors, policymakers, and risk managers. Recommendations for additional study include investigating geopolitical implications on currency dynamics and expanding the investigation to developing economies. These results have substantial implications for controlling currency risk and creating international monetary policy.