A Review Of The World Currency Markets For 2008
Posted by Allison on 13 April 2009, 11:10
What will you think about when you look back on 2008? The chances are that the term 'credit crunch' will be very near the top of your list. This major event really took hold in a huge way during the year, and as we progress through this review of 2008 you will see that the currency markets were heavily affected by what was going on around the world.
Everyone deals with currency in one way or another every single day. Even if you don't have any interest in dealing with currencies to try and make money, you will certainly have thought about going on holiday in another country at some point, or perhaps even buying goods abroad to try and get a better deal.
But when the conditions and situations in a particular country start to affect the value of their currency, it can mean you don't get such a good deal after all. Bear that in mind as we start to explore what various currencies were up against during 2008.
You'll see that this article is broken down into easy to read sections, and we also cover the main currencies that were hitting the headlines (for reasons both good and bad) during the year. But first we should explore the so called credit crunch a little more, so that we can better understand how difficult life became during 2008.
All about the credit crunch
So what happened during 2008? Why did everyone suddenly start talking about the credit crunch and how it would affect individuals and companies?
Well, it is very well known that we tend to go through cycles that are commonly known as 'boom and bust'. Basically, this means we have a certain amount of time where we find it exceptionally easy to get credit; we all have plenty of money to spend (even if it is borrowed from someone else), and our homes are worth ever increasing amounts of money.
But of course this cannot last indefinitely. Sooner or later things turn from the boom years into the bust years – and as we saw during 2008, this can have far reaching effects.
One way to see instantly what consequences this can have can be seen by the invitations for credit that come through the mail. How many of those did you get before the credit crunch really hit hard? We used to get several of these – completely unsolicited and for thousands of pounds – every week. But since the credit crunch, we haven't seen any in months.
Several major banks (not to mention other businesses) collapsed during 2008 in unprecedented scenes, and many more had to be bailed out by their respective governments. Can you ever remember anything like this happening before? It seems as if no one can. And several major currencies attained exchange rates that they could not have dreamed of even a year before. We'll be taking a closer look at some of these in a moment.
So how does all this affect our currencies?
Well, if a country is struggling to get to grips with its economic situation, this will be reflected in how confident other people are to buy the currency used by that particular country. So for example, a classic situation concerns the British pound. We will look at this in more depth shortly, but suffice to say that the economic news coming out of Britain at the moment is nothing short of dire.
Businesses are going under – many of them huge names in the country that are suddenly disappearing – and jobs are under threat and disappearing as well. As people become more insecure about the situation they find themselves in, the country struggles to deal with the ever increasing economic crisis.
Now if you wanted to buy a currency, you would want to buy one that you would make money on. Do you think you would be happy to buy the British pound at the moment, knowing that it is suffering as a result of its country's woes?
Of course you wouldn't – and that is why the exchange rate for this particular currency has taken a nosedive against many other major currencies in recent months.
So there in a nutshell is the problem of the credit crunch. Now let's see which currencies have had a tough time of it during 2008.
The US dollar
The mighty US dollar is resilient, hardy and impenetrable. Or is it? The problems of the credit crunch started in the US in the middle of 2007, so it shouldn't come as much of a surprise to learn that the US dollar has had struggles of its own from time to time.
However on the face of things the currency certainly had a better time of it from August 2008 onwards, when it went up against the British pound. The month average for the exchange rate between the US dollar and the British pound kicked off the year at 0.5074. That's basically just short of 51p per US dollar.
But the picture from August onwards became very different indeed – and it made the UK a more attractive place for Americans to come on vacation if they had money to spend.
The exchange rate crept up to 0.5295 during August, but there was better yet to come as the monthly average increased to 0.5566 during September. This was clearly a sign that the beleaguered British pound was starting to feel the effects of the recessionary signs being seen in that country – and the US dollar was reaping the rewards of this.
And that was a trend which continued markedly through the remainder of the year. If the increase from August to September was impressive, the average figure of 0.5918 achieved in October left those figures standing in the shade. And by November, when Americans could get an average of 0.6515 UK pounds for their dollar, things were clearly on the up for the US currency.
The year ended with the average monthly exchange rate in December standing at 0.6733 – and who knows what it will reach in 2009?
The US dollar also had a mixed year against the Euro, but once more the latter part of 2008 saw better results than the first part. In January 2008 your single US dollar would have got you an average of 0.6793 Euros, but that changed during the course of the year. Indeed, the first half of the year saw that amount drop as the Euro took charge. April saw an average figure of 0.6351, and although that was boosted to 0.6431the following month, there would be another dive to the 0.63 level in July before things started to look up and the power of the dollar would overcome the tentative power of the Euro.
September saw a soaring average of 0.6970, but even this wasn't the best result of the lot. The latter months of the year have certainly been tough in many respects, with businesses struggling and many countries trying to keep on top of the economic situation, with little success it should be said.
But the US dollar still seemed to be able to keep things moving, as is seen by the 0.7511 Euros it was able to claim for each dollar on average during October. That is an increase of 0.0541 over the course of a single month – and there was more to come as it peaked during November at a rate of 0.7860.
December saw a slight slip backwards for the end of the year to an average figure of 0.7425, but even that was considerably more than the US dollar had been able to claim way back in January. Does this mean that 2009 will continue to be a good year for the US dollar, or will it finally succumb to the economic woes that are being experienced by the US at the moment? Only time will tell.
But if you were thinking that the pattern was set during 2008 for the second half of the year to be great for the dollar, that didn't apply to every currency it went up against.
Take the Japanese yen for example, which is going to be next on our look at how various currencies weathered 2008. In actual fact the average figure of 108.082 yen that the US dollar could be exchanged for back in January last year was almost the best that it got. It managed to crawl back up to the heady heights of 109.274 in August, but for the first half of the year the exchange rate stayed in the low 100s, dropping to 100.917 in March.
So what did the US dollar have to give in the second half of the year? Well it was clear that the Japanese yen was going to be the stronger of the two currencies in this particular situation, and when the average exchange rate dropped back to 106.614 in September, it was clear something was afoot. The relative strength of the yen exerted all the necessary pressure on the US dollar, making the exchange rate less desirable to anyone wanting to buy goods from Japan at that point.
The average figures dropped steadily for the remainder of the year, leaving us with a dollar which could claim nothing more than 90.956 during December. That equates to a difference of 18.318 between the highest and lowest points – so the yen was in the driving seat by the end of 2008, and it shows no sign yet of moving.
Incidentally, if you wish to look up historical exchange rates over the past ten years (particularly if you have monthly averages in mind, rather than daily figures) you can go to the Bank of Canada website to get just that information. Located at http://www.bankofcanada.ca/en/rates/exchange-avg.html, this will get you on track to get the figures you need.
So as you can see, as far as the US dollar was concerned it still had the power to remain in charge as far as the exchange rate with several currencies was concerned… but it didn't have enough to topple the Japanese yen, which we will look at now.
The Japanese yen
So how did this currency do last year? Although it is one of the main world currencies, it doesn't often snatch the limelight from other currencies such as the US dollar, pound sterling or the Euro.
But that doesn't mean it isn't worth taking a look at. The ever weakening British pound meant that the yen got more for that currency as the year went on, for example. It started off 2008 with an average exchange rate against the pound during January of 0.00469. It crept steadily closer to the 0.005 mark over the next couple of months, reaching 0.00495 before slipping back down again as the pound managed to find some strength from somewhere.
Over the early summer months we saw a weakening yen, but that started to change during August as the exchange rate averaged out at 0.00484. And in those last four months of the year the yen claimed more sterling in leaps and bounds – reaching 0.00740 by the time the end of the year rolled around.
So was this replicated elsewhere? Did the Japanese yen do well in the second half of the year against more than this one currency, bucking the trend of the downturn in the economy? It is certainly the case that while some currencies suffered through these circumstances, others were able to weather the storm much more readily.
Well if Japan took on the UK pound and won in the latter half of the year, it also managed to pull off a similar feat with the Euro. The exchange rates here followed a similar pattern to those against the pound. In January we started the year on 0.00628, and this increased and then dropped back again before reaching a low of 0.00593 during July.
But from there it took the upper hand and managed to close out the year on 0.00816 – a full 0.00223 up on that low point in July. The British pound was no doubt having a rough time of it during 2008 (and we will take a closer look at this particular currency next), and the yen had no qualms about making the most of that exchange rate while it could.
It also repeated this pattern against the Hong Kong dollar. The pattern was not perhaps quite as pronounced as it had been against sterling, but even then we saw an average exchange rate of 0.0722 during the first month of the year, rising to 0.0852 for the month of December. The yen was clearly in charge and came out rather well during the year as a whole. This was mirrored with the Russian rouble, the Indian rupee and several other currencies too.
But will the yen remain in as strong a position during 2009? We'll have to wait and see.
The British pound
What is there to say about this particular currency during 2008? Well, if you had to single out one currency to take the prize of being the most harassed and troubled currency for the whole of 2008, the British pound would certainly be the first one to jump into most people's minds.
We've already seen how the US dollar and the Japanese yen steadily grabbed more pounds for their exchange rates as the year went on, but how did the pound do against other currencies?
Perhaps the most interesting one for our purposes is the Euro. The British government rejected the idea of joining the single currency when it was first brought into being. And even now, any idea of joining is more often than not rejected.
But how is the exchange rate faring between the two currencies? The pound certainly had a lot to contend with during 2008, so let's see where it now stands with the Euro.
This is a situation where the averages tell only half the story, as we will soon see. In January your pound would have bought you a respectable 1.3388 Euros on average, but that would be as good as things would ever get during 2008. Things then started to edge downwards as far as the pound was concerned, and by the time the last few months of the year came to pass, that downturn had become a nosedive.
The averages for those last three months are as follows. October saw an average exchange rate of 1.2697; November saw that plummet to 1.2073; and December finished somewhat wearily on just 1.1029. But as we said before, averages don't tell the whole story. The highs and lows during December in particular show just what a state of flux the currency markets are in.
The high point that the exchange rate reached between the pound and the Euro during this last month of the year was 1.1882… but the lowest ebb was the point at which a pound was worth just 1.0219 Euros. That means they are very close to becoming a like for like exchange – leaving Brits deserting the idea of holidays in Europe very quickly indeed.
So does this mean that Britain has unwittingly taken a step closer to abandoning the pound and joining the single currency? Many still hope that isn't the case, but we shall see. We might just look back on 2008 as the year when things started to move more readily in that direction.
But the pound didn't take a nosedive against every currency during the last part of the year. For some exchanges it was evident that things weren't quite so clear cut.
Take the situation against the Australian dollar for example, where we saw some extreme highs and lows even on a day to day basis. But how did these pan out over the course of a difficult year?
Back in January the pound could have bought you 2.2339 Australian dollars on average. The very next month that average figure had actually dropped to 2.1564, signalling that the pound was weaker against the Aussie dollar very early on.
But while these two often do have those highs and lows, the next few months erred more on the side of the lows. A slight increase for the pound during March was followed by the low point of 2.0646 in June. But following on from that, we ended up with another even lower point of 2.1382 during August, before things started to pick up for the pound.
The very next month saw an increase of around six cents on average, putting the pound firmly in the driving seat for once. But the average figure during October was even more impressive - 2.4643! That's a difference of nearly twenty seven cents in a single month. And when you consider that the low point of September was 2.1112 and the high point of the following month was 2.5872, you can see that this was a real see saw of exchange rates that left you wondering what on earth would happen from day to day.
December finished up with an average of 2.2240 Australian dollars to the British pound, so things had gone more in the way of the Aussie dollar in those last few weeks. It only remains to be seen whether this is a trend that will carry on into the New Year, or whether it will be an equally choppy sea in 2009 as it was in 2008.
A similar pattern of highs and lows was seen between the pound and the New Zealand dollar as well. And again the high and low points were telling during December in particular. The extremes went from 2.5095 to 2.8105 – giving an average figure of 2.6663 that really didn't reveal the whole story.
So you can see, the British pound was really on the ropes during most of 2008, and things got worse as the year went on. The only question now is whether we have hit rock bottom yet – or whether there is worse still to come. Only 2009 will hold the answer, and we will have to wait and see what it can tell us.
We have already seen how several other currencies have performed against the Euro during 2008, but there is still some ground to cover. And indeed, it can be equally interesting to check out the currency's performance against some of those lesser thought of currencies elsewhere.
Take the Australian dollar for example. You might not be too surprised to learn that the Euro won this battle hands down, but what might raise your eyebrows is how much it won by.
January 2008 saw the Euro claiming 1.6685 Australian dollars on average, with a high point of 1.6883. But bear that high point in mind as we progress through what was a very interesting year in this case.
Just two short months later that average figure had risen to 1.6763. It shot up again the following month to 1.6935, but then dropped back sharply during May, to achieve an average exchange rate of 1.6395. Was that the high point of the year been and gone already, or was there more to come?
There was a lot more as it turned out. After a couple of relatively uninteresting months, that average figure took us all by surprise and jumped up to 1.6952 during August. And that was the start of a series of huge increases in the exchange rate that the Euro was achieving against the Australian dollar during the latter part of 2008.
By September the average was up to 1.7545, but even that leap wasn't large compared to what happened next. Because by the time all the figures for October were collated and the average amount was worked out, it stood at 1.9414. That is a whopping increase of 0.1869 over the course of a month! We certainly did see some amazing figures popping up all over the place during 2008, but that has to stand as one of the most impressive ones of all.
The next month saw just a minor increase but we clearly weren't done yet. During December the average exchange rate between the Euro and the Australian dollar was an incredible 2.0179 – and the high point of that period stood at 2.0735. When you compare that to the low point of January, which was 1.6533, you can see that this is completely different territory to where we finished up for the year.
So did the Euro do equally as well over in New Zealand? Quite often you can see that no matter what happens in Australia, a similar picture will emerge in New Zealand as well, and vice versa. So was this the case in 2008?
Let's find out. Back in January the high and low points for the Euro's exchange rate with the New Zealand dollar were a small distance apart - 1.8822 and 1.9336 respectively. The average was 1.9039, but while that dropped significantly the following month to 1.8527, it didn't stay that way for very long.
March saw the average figure soar back up to 1.9323, and as if that wasn't enough it improved still further as the year settled in and gave way to April. By this point we saw the figure get very close to the 2.00 mark, before it stalled at an average of 1.9960.
At least the weakness of the New Zealand dollar meant that the British pound wasn't entirely alone in its troubles; some other currencies were clearly suffering by the hand of the Euro as well.
And as the year marched on and the Euro marched on with it, the New Zealand dollar would probably have been feeling just as weak as the pound. By the end of the year, the Euro would get you an average of 2.4185 New Zealand dollars. That meant the high point of the month was 2.4559, compared with the much lower rate of 1.8310 at its lowest point in the year in February. That is a huge difference!
It is this kind of result that makes it clear that while the British pound may have been hitting the headlines for all the wrong reasons during 2008, it wasn't the only currency to have had one of the toughest struggles of its life. And the journey is clearly not over yet, as the strongest currencies continue to take advantage of the weaker ones for the foreseeable future.
The question is whether the Euro will continue to batter the pound – and perhaps the Aussie and New Zealand dollars with it – into submission.
Let's take a quick look at the Canadian dollar now. While the majority of Brits would probably think about holidaying in America before they would consider Canada, the exchange rate with this country is still well worth looking at.
You see, sometimes it is the case that the currencies we have most of an interest in (namely the US dollar and the Euro) overshadow everything else. That means we can forget about other currencies such as the Canadian dollar, which are still fascinating to take a look at.
So how did the Canadian dollar do up against the British pound last year?
Well it wasn't quite as pronounced an increase as some of the other currencies enjoyed, but there was no doubt that the dollar ended up the winner as it claimed more UK pounds to its dollar by the end of the year than it did at the beginning.
That initial average during January was 0.5030, but by the end of the year it had risen to 0.5448. Not as remarkable as some other currencies have achieved to be sure, but worth noting and it makes you wonder whether this is only the start of another downturn by the pound.
Switzerland might be a relatively small country, but it has retained its own franc and refused to join the single European currency, the Euro, ever since its inception.
But how did the franc weather the storms of 2008? Can it still hold its head up as a strong currency that its people do not want to get rid of? Let's find out.
It had something of a choppy year against the US dollar, starting off with an average exchange rate of 0.9072 in January. But there was ground to be taken during the next few months, when the dollar was having trouble keeping up with this small but significant currency.
During March that average rose up to 0.9860 – rising to 1.0161 at its peak for the whole year. In fact the next few months showed that the Swiss franc was well in control, claiming good exchange rates and staying ahead of the dollar for some significant amount of time.
It was in the latter few months that the US dollar started to rear its head at last. The average exchange rate for October dropped back to 0.8777, and it dropped even further during the following month to 0.8401. But the Swiss franc is always capable of a fight back it seems, and so it happened that the average figure for December was 0.8780. That is 0.0292 lower than the figure we saw in January, but at least it was heading back in the right direction again.
There aren't many major currencies left in Europe now that the Euro has taken over, but the Swiss franc and the British pound are just about the two biggest. So did the franc manage to get the upper hand here?
The answer, perhaps unsurprisingly, was a resounding yes. The average figure we were looking at during January was 0.4603 UK pounds to the Swiss franc, but that was very far from the figure we ended up with in December. Let's track that journey to see why Britain is at least becoming a good place to come on holiday for those people in Europe who want to make their money stretch further.
The average rate went up slightly the next month, but the big jump was reserved for March. Here we saw an average of 0.4927, with the maximum rate achieved of 0.5062 UK pounds to the Swiss franc. Could this be increased even further? The Swiss were certainly hoping so – and their wishes would be answered in due course.
That average figure for the month finally broke through the 0.50 barrier during September, when it crept up to 0.5010. But could the Swiss franc achieve more still in the final three months of the year? The pound was certainly struggling against all comers at this point, so it was fairly clear that the Swiss franc could indeed make a difference and claim an even better exchange rate in the very near future.
And this was exactly how things did turn out. There was a slight improvement to 0.5192 during October, but the biggest changes were reserved for November and December, when the average exchange rate grew to 0.5471 and then 0.5911 respectively. That is an incredible 0.1308 increase over the average figure achieved back in January – and it shows just how powerful other currencies are becoming when they go head to head against the pound.
So was it such a good year for the Swiss franc elsewhere, or was it merely taking advantage of the pound?
Well as far as its performance against the mighty Euro was concerned, it really did point to the strength of the currency and the fact that perhaps it chose correctly when it turned down the chance to join the single currency. The average exchange rate against the Euro in January was 0.6163; and while the rate reached a peak of 0.6603 in November, it didn't lose much ground during the last month of the year. During December the average was 0.6504 with a high point of 0.6734, so clearly the Euro isn't always the best or the strongest currency in Europe.
So indeed it really was a dramatic year in the currency markets all around the world. As some countries really suffered in all respects and saw their currencies dip below a level previously almost unheard of, so other countries – such as the USA – managed to hang onto a respectable performance in their currency. This was despite the fact that the economy and the whole jobs and employment situation looked as dire as ever.
If you want to keep ahead of the news as it happens during 2009, make sure you visit the CNBC news website. If you visit http://www.cnbc.com/id/15837548/cid/97220/sh/3 you will be able to see the latest news stories as they happen, with regard to the currency markets.
And as we look ahead into the fresh year that is to come, we must surely be wondering what we will be writing about this time next year, when we come to review 2009. Will it be worse than 2008, as some people are predicting? Are we going to see exchange rates that are even worse than the ones we have made mention of in this article? It can seem hard to believe, but it may still happen.
At one point back in March 2008 the British pound could get you 2.0340 US dollar – but by the lowest ebb at the end of the year, that had sunk to just 1.4471 US dollars. And some people are saying that we could see a pound that would claim just 1.25 US dollars very near in the future. Whether that happens or not remains to be seen, but if it does we will look back at 2008 and see those early few months as the time at which those big changes began.
How the UK copes with the impending recession remains to be seen. While everyone thinks we are in a recession now, technically it has yet to actually happen. The seasonal joy of Christmas and the increased shopping that occurs during that time seemed to save us from meeting the criteria needed to officially announce one.
But it cannot be far away, and if or when it happens, it makes you wonder how much lower the pound could sink as a result. One thing is for sure though – the sooner this economically difficult period comes to an end, the better it will be for the world as a whole.
And perhaps we will be reporting on the beginning of that end in 2009.