Yen has risen and fallen while Gold is booming but Euro may be the true pulse of the world economy.
Currency Anomalies and Commodity Boom
RISE AND FALL OF CURRENCIES Saad Sarwar Muhammad Saturday, March 14, 2009
Currency markets have had a rough year for the past twelve months where all the major currencies have declined with respect to the US dollar. Chinese Yuan is the only exception amongst major currencies. The reason for the appreciation for the Chinese currency is the strength of its export related economy and the record trade surplus it is still posting with its main export market. i.e. the US. The Chinese reserves have hit more than $2 trillion, which would also help the Chinese currency retain its strong position in the world markets.
The Japanese currency’s (Yen) rise and fall over the past twelve months vis-a-vis the US dollar is somewhat of an anomaly. However, this anomaly can be attributed to the carry trades where the low yielding Yen has played a major role, resulting in the strengthening of the Yen in the calendar year 2008. The declining stock markets had been aiding the rise of the Japanese currency due to the carry trades. This mechanism however, came to an end since the beginning of the current year with the Japanese currency falling out of favor due to carry trade cycle completion and the deterioration of the ailing export led Japanese economy. Yen has fallen by around 9% against the dollar just this month alone. It remains to be seen, how the Japanese companies react to the weaker Yen and whether the weakening currency would eventually make Japanese exports more competitive in the world market than they have been lately due to the strong currency.
The Euro has also seen a gradual erosion of value versus the US dollar. It has come down by 22% against the dollar since its peak in July. There is a very high correlation of the Euro with the price of oil (0.77). It can be seen from the graph that the Euro depreciates in value when the price of oil goes down. The low price of oil therefore seems to be a good signal of the health of the world economy and no major currency reflects it better than the Euro as can be witnessed from the graph.
The Eastern European countries like Poland, Hungary, Romania and Czech Republic have also launched a coordinated attempt to bolster their respective currencies of late. They have claimed that they will be utilizing nonconventional methods to improve the value of their currencies. However, it is anticipated that the interest rate mechanism would be the main tool that would be used for the purpose.
Gold prices have also seen a major hike since the beginning of the year. Gold prices have increased at the same time the Yen has been falling. It has been found from calculations that there exists a negative correlation between the two. Gold prices might increase to record levels in the future thanks to the weakening currencies around the world. The recession according to some estimates is much deeper than previously thought.
The only real signal for determining the true health of the world economy simply is the price of oil; the lower the price of the commodity, the deeper the recession. The graph of Euro amongst major currencies can also be called the cardiograph of the world economy; the lower the value of Euro vs. US dollar, the worse the fate of the world economy. It seems to me the pulse of the world economy is the Euro.
Saad Sarwar Muhammad has a BS in Computer Science from the University of Central Oklahoma, USA and an MBA (Finance) from the Indiana University of Pennsylvania, USA. He writes on issues related to the world economy with special emphasis on Pakistan, US and China. Other areas of interest include information technology, politics and religion. He is currently working as an Assistant Professor in Information Technology and E-commerce as a Cluster Head at NUST Business School(NBS), Rawalpindi, Pakistan.
email: muhammadsaadsarwar@gmail.com
