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March was a busy month in the world of forex trading. Specialists Berkeley (Bahamas) Ltd bring you up to date with all of the latest developments in the foreign exchange market.
The Pound
The Pound fell sharply against the dollar, euro and yen this March, in reaction to the continuing fall of the UK housing market.
A report by HBOS plc indicated a 2.5% decline in prices for March with the annual growth (March 2008 to March 2007) at just 1.1%, significantly below the overall CPI level in the United Kingdom (2.5%).
This indicates that the country’s current mortgage market slump is far from over.
The Dollar:
March saw the continuing decline of the dollar. Analysts are forecasting that the US economy is headed towards recession and with no signs of recovery, the dollar’s slide is predicted to continue well into the future.
The fall of the dollar began over concerns over mounting U.S debt and the trade deficit. Relatively low U.S interest rates have made it more attractive for investors to put their money into other currencies, which offer higher rates.
Since 2002, the Dollar has lost 70% of its value in relation to the euro, as the euro recently climbed from around 90 U.S. cents to more than $1.50. March also saw the dollar fall to its lowest level against the yen since 1995.
The Yen:
A falling dollar traditionally has an adverse effect on the Japanese economy. The nation is particularly vulnerable to currency fluctuations because its economy depends so heavily on exports.
Japan's economy grew by 2.1% last year, and it is estimated that as much as 50% of the county’s GDP comes from exported goods.
A weaker dollar makes Japanese companies' products more expensive overseas, while reducing the value of their dollar-based earnings when converted into yen.
The last time Japan faced a seriously weak dollar was in 1994 and 1995, when the dollar stayed below the 100-yen level for a year and a half, reaching an historic low of 79.75 yen. Japan fought back by intervening heavily in the currency markets to depress the value of the yen and boosted government spending to help weaker companies.
Whether or not this will happen again in 2008 is unclear.
The Euro:
Recent research by American economists has revealed that the euro could overtake the dollar as the world’s reserve currency within the next 10-15 years.
This prediction may seem unlikely when you consider that the dollar has been unchallenged as the world’s reserve currency for nearly 150 years. Current figures put the dollar’s share in global currency reserves at 66%, compared to the Euro, which is at 25%.
Several factors, however, look set to challenge this dominance.
Firstly, with US national debt currently standing at $9.4 trillion and the nation seemingly heading for recession, America’s economic position has been significantly weakened. Secondly, before the introduction of the euro there was no creditable alternative to the dollar. Germany’s deutsch mark and the Japanese yen have historically been potential candidates, but the yen has fallen away due to Japan’s recent economic turmoil.
With Germany now part of the euro and looking strong, the currency is now in a good position to replace the dollar.
Further to this, US monetary and foreign policy is facilitating inflation and eroding the dollar, meaning that the central banks have lost confidence in the increasingly unstable currency.
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March Currency Roundup
