Currencies: Standing Still?
The financial world was in a whirl during 2011, marred by uncertainty and affected by catastrophic and unpredictable events. However, most financial instruments have recorded a ‘flat’ year, based on year-end numbers. Is this true of currencies?
Ultimately, 2011 may be known as the pinnacle of the eurozone sovereign debt crisis, where contagion threatened the (once) economic powerhouse of Italy and the sovereign crisis moved to a eurozone banking liquidity crisis, causing an about-turn in ECB policy. Lack of action or even evidence of ‘a plan’ from the eurozone saw uncertainty and, as a result, a lack of confidence from consumers, industry, banks and even policymakers take hold of the global economy, reaching a zenith as the year came to a conclusion.
In the currency markets the pound started the year at 1.5482, rose to 1.6708 at the end of April and ended the year at 1.5547. The euro started the year at 1.3355, hit a high of 1.4830 at the beginning of May but ended the year lower at 1.2936. The story behind the volatility can be traced through the negative sentiment facing the dollar during the first 4-5 months of the year and the sharp reversal in the last 4 months of the year. In September the dollar was very strong and rose 6.96%. It then fell 5.91% in October only to rebound by 6.29% in November (against the USD Index). Most of the volatility originated from the continuing problems facing the eurozone and its inability to resolve the crisis facing the single currency, which worsened as the year progressed.
China and the other Asian currencies have benefitted from the continuing decline of the western currencies, with the Chinese yuan gaining steadily throughout the year. The economic news that came out of China was not as good as some might have predicted a year ago, but the stories are significantly ‘less bad’ than those in the western hemisphere.
What 2012 will bring is uncertain, and, given the current environment, it would be unwise to make any strong predictions. However, this year, we would not be surprised if the Asian and Latin American countries with stronger growth outperform the more developed and heavily indebted Western countries. The US and UK economies are both showing that recovery is at least on the agenda, albeit slow, and the impact that this will have across the global financial markets may provide some much-needed stability.
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