It’s hard to remember the last month that went by with little or no remarkable news regarding the global currency markets, and March 2008 was certainly no exception.
It’s not often that the United States dollar comes under any real pressure from other currencies, but that was certainly the picture during March 2008, and indeed it continues to find things hard going at the present time.
But why is this? There are always underlying reasons for why certain currencies suddenly start to struggle, and when the currency in question is the US dollar it certainly does make people sit up and start to take notice.
The truth is that the US economy has been having problems for a while now. The housing market over the world as a whole is rather less buoyant than it was, but it seems to be having a particularly pronounced effect in America. Of course the dollar has had its wobbly moments in the past, but they have never seemed to last very long.
However, March saw a dollar which showed no signs of regaining its usual strength. Take its performance against the Japanese yen for example. It hadn’t dipped below one hundred yen for years – well over a decade in fact – but things showed signs of changing in early March as the dollar started sliding from 103.57 yen and getting ever closer to the 100 yen mark as each day went by. By the 14th March it was barely clinging on, and managed to hang onto to the value of 100.20 yen as the markets closed for the weekend.
Monday brought a sad tale for the US, as the dollar immediately slumped to 96.88 yen. It rallied the following day but spent the whole week valued at less than 100 yen. Although the dollar did manage to break through the 100 yen mark again for a couple of days, it finished the month by dipping back below it and finishing at 99.85.
How does this bode for the future? Are the days of the dollar numbered? Only time will tell, but for now all eyes are on the US and its economy, and the possibility of a recession is still not out of the question.
But the dollar was not alone in its woes during March. The pound was also weak and unable to take advantage of the similarly weak dollar. Everyone was looking at the Bank of England and wondering whether the interest rates would be cut, as the possibility of a recession continued to be voiced in some quarters. A cut in interest rates would seek to stabilise the pound somewhat, and hopefully help it to regain some of its strength. Early on in the month the pound was crippled by the Euro and reached its weakest point against it in the history of the relatively new European single currency.
The winner, it seemed, in all this doom and gloom, was the Euro. One or two rate cuts during the remainder of 2008 would ideally help it to maintain its position, but it remains to be seen when this will happen. But even the Euro wasn’t immune to the drama that the global currency markets experienced during March, as despite a strong start it too faltered a little (although not in such a pronounced way as the dollar) during the middle of the month. The picture of the Euro against the pound however was a strong a steady affair. It seems that the Euro quietly grew in power and could buy more sterling as the month went on.
How will it fare during April? Let’s wait and see.
March 14th saw the news break that the US firm Bear Stearns was in grave trouble. The investment bank had, it seems, invested in the wrong places and become a victim of the ever increasing woes of the subprime mortgage market.
It was this event (which led to an unparalleled bailing out by the Federal Reserve) which largely contributed to the dramatic slump that the American dollar was seen to suffer, coincidentally at the very same time the news broke. JP Morgan ended up offering a buy out to the struggling company. This is a classic example of how an event which is seemingly unrelated to currency in a direct manner ends up subjecting it to a direct hit.
Staying in America (you would be right to assume that there has been plenty of activity in the currency world there of late, albeit mostly of the downbeat type) there has been no slackening off in the talk which keeps buzzing around about the possibility of returning to the Gold Standard that the dollar was once pegged to. Of course there has been talk about this for some years, but in light of recent events regarding the ever present weakness of the dollar more people seem to be wondering if the Gold Standard would be a better idea after all.
This would mean the dollar would go from being a fiat currency (one that essentially isn’t worth anything, which some people would probably agree with anyway at the moment…) to being a type of commodity money, which would be pegged to gold. If it did it could end up being the first world currency to go back to the Gold Standard, which was abandoned some decades ago and at present is no more than a memory.
Given the overall downturn in the economies of several countries during March – one which shows no encouraging signs of halting, let alone reversing – it is perhaps not surprising that those in favour of a single global currency took the opportunity to stand up and let everyone know what a great thing it would be if we actually did it.
Of course what sounds good in theory may not necessarily work in fact, but the Single Global Currency Association announced in the middle of March that now was the ideal time to start thinking about how beneficial a single world currency would be. If we did live in a world where there was only one currency we wouldn’t have all the woes of the financial markets that we have now.
There could of course be other problems since different countries have different economies, strengths and weaknesses; if a single global currency ever did come into being it could take years (if not decades) before every single country was in a position to be accepted into it.
However in the current climate the Single Global Currency Association is riding high on all the uncertainty and putting it to good use as far as its own goal is concerned.
Despite its recent troubles the dollar is still standing firm as the world’s foremost reserve currency, but this could soon change if world events continue to progress the same way they have been.
Institutions the world over hold the strongest reserve currencies at all times since they bring with them a strength and reliability that can open many doors. Most people know that the dollar is currently the world’s strongest reserve currency, with the Euro and the pound sterling not far behind.
The question was raised during March as a direct result of the struggles that the dollar is going through. But it won’t be the pound which overtakes it as the world’s strongest reserve currency – on present form it is likely to be the Euro.
As the dollar weakens still further, it automatically becomes less desirable to those countries that are holding vast amounts of it in reserve. When the dollar is strong it seems that nothing can touch it, but even though the Euro has only been around since 2002 it already has all the makings of becoming the prime reserve currency. We may have to wait a decade or more to see it happen – this kind of event is a major one in the world of currency and it doesn’t happen overnight – but it appears that the wheels may already have been set in motion by the events that have been happening over recent months.
March 2008 could eventually be seen as the month in which the decline of the dollar as the world’s premier reserve currency began in earnest.
The last day of the month of March saw an announcement from the Venezuelan Finance Minister, Rafael Isea, to the effect that Venezuela was going to go from being a single currency country to one that had a dual currency.
The country had a bad year in 2007, which is what has led to the March announcement. Its unit of currency – the bolivar – was severely crippled against the dollar last year, to the value of a whopping 100%. This devaluation has led to a huge rise in inflation, reaching the heights of 22.5% and making it clear that something needed to be done – and soon.
It seems that Rafael Isea has opted to take this route rather than risk the devaluation getting even worse this year. Anonymous sources in the country have not showed much confidence in the minister, but this could prove to be a good move. The dollar will “trade through a global bond on the local stock market,” according to the adviser.
It will be interesting to see whether this tactic solves the country’s problems, although given the present situation it is hard to see that it could get any worse. Perhaps by next month we will see some indication of whether the idea is a success or not.
Every currency changes from time to time, as new designs are released and the old ones are gradually recalled.
March saw the rollout of brand new banknotes in Bahrain on 17th March, which was done to conform to a national law which had been passed back in 2006. Not only do they feature new designs, the notes also have advanced features included within them which will hopefully reduce the instance of fraud still further.
Four days before this, the United States welcomed in a new $5 banknote, which also had better security features than the previous design. One thing which has stayed the same on this new design however is the portrait of former President Lincoln.
Both of these new issues will run alongside the old bills for some months before superseding them completely, as is the custom with most new banknotes.
If nothing else, March 2008 was certainly a month of drama in the currency markets. The big question on everyone’s lips at the end of the month had to be whether or not the United States dollar could regain some of its previous strength, or whether the troubles the country is currently going through would be too hard to surmount at this present time. Expect an update next month to provide the answer.
Everyone is concerned about the effects of the global credit crisis and while it is hard to predict how this will play out, one thing is clear – it is not likely to end anytime soon. Many people are saying that the current crisis harks back to the times of the Depression, and while some may dismiss this as scaremongering it is hard to dismiss it entirely. Exchange rates between usually powerful currencies are slipping and being challenged by others, and as things stand we can expect many more frequent changes to the exchange rates over the coming month.
Will the enthusiasts for a single global currency have more grist to their mill next month? Perhaps the dollar will have rallied by then, or maybe the Euro will have taken an essential step closer to becoming the new reserve currency?
Only April can tell.