Dow Jones unveiled plans last month to launch a new index that will track exchange rates against the euro every 15 minutes.
"The use of the euro in the capital markets has inspired Dow Jones to create an index that tracks the euro," John Prestbo, editor of Dow Jones Indexes, told the fourth biannual capital markets conference hosted by Hypothekenbank in Essen in June. "The US dollar is the major component," he said.
Dow Jones Indexes has developed more than 3,000 indices and is best known for its equity products. Currency indices are expected to be a major new market in FX according to investment banks.
The proposed index has a 40% weighting to trade flows between any eurozone country and non-euro country such as the US and Japan, 20% to the money supply in the non-euro country, and 20% in its GDP.
"Most currency indexes are trade weighted, reflecting trade flows between the two countries," said Prestbo. "We decided that in the European region, oil from the North Sea and Russia, for example, tended to elevate some countries to too high a level, so we added money supply and GDP. We wanted to keep the index consistent."
Dow Jones is expected to add the Chinese renminbi to the index "in time", according to Prestbo. "We will add a shadow index with China in it so we are ready to go," he added. "Its right there, stage left, waiting for its cue to come on."
Although there is a lot of inter-company trade between eastern and western Europe, eastern Europe is not represented in the index.
"We took the view that unless we could collate [eastern European currencies], we couldn't use them," Prestbo added. "There's no single currency there, so they probably won't ever appear as a traded currency that tracks the euro."
Historically, central banks have offered trade-weighted currency indices (TWIs) that have only been available on a bespoke, over-the-counter basis. Other major index providers such as MSCI and Standard & Poor's so far haven't offered anything like this.
Among the banks, Deutsche Bank has been a key player in developing a range of FX indices that are either based on central banks' trade-weighted indices or themes such as Asia and other emerging markets.
It is understood that Dow Jones has not launched a dollar index as there are already a number of dollar indices in operation in US, such as the Federal Reserve's major dollar index DXY.
Prestbo said that given there was no euro index, the euro represented an opportunity to gain first-mover advantage. At the time Euromoney went to press, the launch was scheduled for July 12 2005.