2024, Vol. 7, Issue 2

This article explores the equilibrium dynamics of the USD/INR and four other major currency pairs-USD/EUR, USD/GBP, USD/JPY, and USD/CHF-using daily exchange rate data from 2014 to 2023. The analysis applies Pearson’s correlation, Unit root tests (ADF and KPSS), and cointegration methods, including the Johansen and Engle-Granger tests and Vector Error Correction Model, to assess both short-term and long-term relationships between these currencies. Descriptive statistics and visual analysis provide insights into the fluctuations and volatility patterns during this period, characterized by significant global economic events.

The results show limited evidence of cointegration among most currency pairs, with the exception of USD/CHF, which exhibits a strong long-term equilibrium relationship. The Vector Error Correction Model (VECM) highlights that while USD/CHF has a robust mechanism for correcting short-term deviations, other pairs like USD/INR and USD/GBP show weak or insignificant adjustment toward equilibrium. These findings suggest that factors such as interest rate changes, geopolitical shifts, and market risk perception play a more prominent role in influencing short-term fluctuations in the currency market, particularly for the USD/INR pair.