SCB Stable Currency Benchmark

No matter where you live, your home currency is constantly going up and down in value against other currencies all over the world. This fluctuation causes more than a math inconvenience. It also is costly if you’re on the wrong side of a currency conversion. And if you’re an investor or analyst, you face what we call the "rubber ruler" problem. Changing currency values mean you’re often at a loss to determine what part of a change in an index or a good is due to a move in the currency you’re using as opposed to the item itself.

In fact, when you see a change of value in something measured in local currency units, nine times out of 10 the real change is not just in the thing itself but also in the yardstick. Sometimes the only change is in the yardstick.

For example, the dollar crashed 33.6 percent from July 2001 to December 2004. This crash meant that all financial markets denominated in dollars had to go up 50 percent just to stay even in terms of global purchasing power. (It might seem strange, but that's how the math works.) Gold did better than keep pace, but all the dollar-denominated Dow did was climb back to the same level it was at in July 2001, which means that it actually lost 1/3 of its global purchasing power during this time.

Whenever the dollar rallies, the same forces move in reverse.

Given available financial vehicles, it’s impossible to avoid speculating. For instance, when the dollar goes up, as it did for nearly a decade beginning in 1992, baskets of foreign currencies get hammered. Choosing a single currency puts you at risk that you picked the wrong one. If you are in a T-bill or money-market fund, and the dollar loses one-third of its value, as it did from 2001 to 2004, your global purchasing power is devastated.

Gold funds are great when the metal’s trend is up, but you can lose value very fast when the trend is down. Stock funds, real estate trusts and junk bond funds all carry substantial risks of loss and default. Foreign currency funds, U.S. Treasury bill funds, money market funds and hedge funds all soar and collapse from time to time. If you’re in a foreign currency fund, you probably own some unstable currencies. In every case, you have to make an investment-timing decision not only about the goods you’re buying, but also about the currency or currencies they are denominated in.

Convenient and uniform. The SCB gives users a single unit of measure for valuing goods in any country, thereby reducing the need to convert currencies.
Constant. The SCB mitigates the fluctuations of ever-changing currency relationships, meaning that as a measure of value it is divorced from individual local currency swings.
Stable even in dire situations. The SCB creates a hypothetical basket of the currencies that together are likely to remain stable in adverse economic conditions.
Useful. The SCB serves as a convenient parking place for safe capital storage, virtually free of currency risks.