21 February 2009

The performance of the Yen shines through over the past twelve months

¹Based on the US dollar broad index. The broad index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners.

²Equilibrium exchange rate values are sourced from estimates of the fundamental equilibrium exchange rates (Central simulation, July 2008) by William R. Cline and John Williamson at the Peterson Institute for International Economics.

Martin Ellis, economist at Clerical Medical, said:
"The uncertainty in the international financial markets over the past twelve months has contributed to significant variations in global currency movements. The Icelandic Krona lost almost three quarters of its value over the past year while the Japanese Yen rose by almost a fifth against the dollar.

"During such times of uncertainty investors often look to hold US dollar assets as a guard against significant exchange rate volatility. This has been true during the past 12 months with the dollar rising by 13%."

Key findings

Japan recorded the strongest currency performance over the past year New research by Clerical Medical, based on a broad basket of 46 currencies, shows that the Japanese Yen was the top performing currency over the past year. The Yen appreciated by 18% against the US dollar over the twelve months to January 2009. This was significantly more than the rise in the Chinese Yuan Renminbi (5%) and the Hong Kong dollar (0.5%). Only four out of the 46 currencies surveyed recorded an increase in value against the US dollar over the past year.

The Japanese Yen has benefited from an unwinding of the 'Yen carry trade' with speculative investors looking to offload risky investments and repay their Yen denominated loans. Investors had previously borrowed in Yen and then invested the proceeds in higher yielding currencies, causing a decline in the Yen's value.

US dollar's traditional role as a 'safe haven' for investors has seen it increase The US dollar appreciated by 13% on a broad weighted basis1 over the past year despite the marked deterioration in the US economy and the rapid decline in US interest rates. During periods of financial market turbulence the US dollar is often seen as something of a safe haven for international investors looking to hedge against substantial exchange rate volatility.

Iceland was the biggest currency loser over the past year 15 out of the 46 currencies surveyed lost a fifth of their value against the US dollar over the past year. Unsurprisingly, the Icelandic Krona recorded the most significant depreciation, falling by 70%. The turmoil in the global financial markets hit Iceland particularly badly, leaving the country close to bankruptcy. The dramatic slide in the value of the Icelandic currency along with high inflation led its central bank to raise interest rates from 12% to 18% in October 2008.

The New Zealand dollar, at -35%, recorded the second biggest decline in value, followed by the South Korean Won and the Russian Rouble (both -32%).

Pound depreciates by almost a third over the past 12 months The UK pound slid by 27% from $1.99 to $1.45 between January 2008 and January 2009, taking sterling to 15% below the 10 year average of $1.70. The worsening prospects for the UK economy, and the significant decline in interest rates, have contributed to the fall in sterling.

Euro down by 14% against dollar over last 12 months The euro fell from $1.48 to $1.28 over the past year, a decline of 14%. The depreciation of the euro in 2008 was almost half the fall in sterling over the same period (-27%).

Pound and Euro are below their estimated equilibrium values The substantial exchange rate volatility over the past year has resulted in a significant shift in global exchange rates away from estimates of their equilibrium value2. For example, the US dollar value of pound sterling in January 2009 ($1.45) is 24% lower than the estimated equilibrium exchange rate of $1.91, while the euro ($1.28) is 13% below its estimated equilibrium level ($1.47). These comparisons suggest that both the pound and the euro are currently undervalued in dollar terms.

Exchange rate volatility sees significant changes among the biggest gainers None of the ten currencies that recorded the largest appreciation over the past year featured in the list of biggest gainers over the twelve months to January 2008. Five out of the ten currencies that were among the biggest currency winners in the past twelve months were among the ten currencies that recorded the largest depreciation in value over the corresponding twelve month period to January 2008.

¹Based on the US dollar broad index. The broad index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners.

²Equilibrium exchange rate values are sourced from estimates of the fundamental equilibrium exchange rates (Central simulation, July 2008) by William R. Cline and John Williamson at the Peterson Institute for International Economics.

Editors' notes:

All Exchange rate data sourced from Datastream.

Equilibrium exchange rate values are sourced from estimates of the fundamental equilibrium exchange rates (Central simulation, July 2008 paper) by William R. Cline and John Williamson at the Peterson Institute for International Economics. Fundamental equilibrium exchange rate refers to the real effective exchange that is consistent with macroeconomic equilibrium. http://www.iie.com/

Chart 1: Major currency movements, Jan-2008 to Jan-2009

Source: Datastream

Table 1: Biggest currency winners (against the US$), Jan-2008 to Jan-2009

Source: Datastream

¹Based on the US dollar broad index. The broad index is a weighted average of the foreign exchange values of the U.S. dollar against the currencies of a large group of major U.S. trading partners.

Table 2: Biggest currency losers (against the US$), Jan-2008 to Jan-2009

Source: Datastream

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