http://online.wsj.com/article/SB113344659938311319.html?mod=home_whats_news_europe Citigroup Unveils New Currency Measure Using Investor Fund Flows By CRAIG KARMIN Staff Reporter of THE WALL STREET JOURNAL December 2, 2005; Page C3 The dollar has fallen 10% since the end of 1999, according to the popular U.S. Dollar Index, which measures the buck's performance against a basket of currencies. But Citigroup argues it is more accurate to say the dollar has tumbled less than 6% over the same period. Why the discrepancy? Citigroup is rolling out a new way to measure changes in currency values. Instead of studying international trade flows to get a sense of the relative weightings of the world's currencies, the new Citigroup Flow Weighted Index looks at flows of capital back and forth among international investors. Citigroup argues that this is an important change because nowadays portfolio managers and speculators -- not large companies -- are responsible for the bulk of foreign-exchange activity. [Art] Yesterday, Citigroup began trading options on this index and 10 other currency-related indexes, which the bank says are the first currency indexes ever to be based on investor flows. The weightings for each index are based on fund-flow data collected by the bank over the past three years, and every index will be revised annually to reflect the latest fund-flow figures. "Fund flows from hedge funds and other money managers are extremely important," says Arnold Miyamoto, a managing director for Citigroup in New York. "This index is a better representation of what goes on the in the currency market." Currently, the benchmark for currency trading is the U.S. Dollar Index, which is calculated by and trades on the New York Board of Trade. It includes six currencies that are based on data from international trade flows. There is also a J.P. Morgan Dollar Index, which includes a basket of 18 currencies and is also based on trade flows. The new Citigroup Flow Weighted Index weighs five currencies. While it is far from clear if the new indexes will catch with global money managers or currency speculators, Citigroup's dollar index comes at a time when currency traders are increasingly attuned to international capital flows. The Treasury Department's monthly report on foreign purchases of U.S. securities is closely scrutinized and often causes large moves in the dollar. And analysts say investor flows into higher-yielding U.S. debt securities are a big reason behind the dollar's rally this year. Citigroup, one of the largest foreign-exchange dealers, estimates that about 70% of all currency transactions world-wide these days are related to investor fund flows, including trading done by stock and bond portfolio managers, hedge funds and other speculators, commercial banks and central banks. Only 30% of foreign exchange is related to transactions from the corporations that are measured in government trade data, Citigroup says. Currency indexes have in the past reflected trade patterns because when the dollar went off the gold standard and began trading freely in the early 1970s, large companies doing business in many markets around the world were responsible for most of the foreign-exchange activity. But for many years now, portfolio investors have become the bigger players. Carlos Asilis, a money manager for the hedge fund Vega Plus Capital Partners, says it is important to be aware of international portfolio flows. But he isn't convinced any index can properly reflect the rapid movement of investor capital. "History has shown that capital flows are far more volatile than trade flows," Mr. Asilis says. He thinks that portfolio flows can shift so quickly that an index created in 2005 may look out of step with the changing nature of these flows by the middle of next year. Others suggest that the difference in performance between Citigroup index and the existing ones won't be that great. Since the end of 2002, the Citigroup dollar index is down 8% while the U.S. Dollar Index is 10% lower. "Since fund flows often reflect broader trade patterns, these indexes are going to be highly correlated," says David Gilmore, an economist at the consulting firm Foreign Exchange Analytics in Essex, Conn. Moreover, with the exception of Citigroup's exclusion of the Swedish krona, the base currencies are the same. Citigroup's index has a slightly lower weighting for the euro and Canadian dollar in its basket, and gives a bit more weight to the yen, British pound and Swiss franc. Late yesterday in New York, the euro was at $1.1733 from $1.1791 the day before. The dollar was at 120.44 yen, from 119.82 yen. Write to Craig Karmin at craig.karmin@wsj.com