Economists take several factors into consideration when trying to judge where currencies are moving. And they often get it wrong. But to give an idea of some of the factors involved in evaluating a currency for risk, the Mail & Guardian spoke to some economists and analysts to review some of the top currencies on the market today.
From the perspective of a South African investor, the best route might be to invest in rand-denominated global unit trusts, recommended Equinox analyst Peter Digby. These funds are generally diversified across markets and currencies, he said.
‘My thinking is to say, don’t try to take on currency speculation yourself,” said Digby, ‘You can get your fingers easily burnt.”
We chose to look the United States dollar, the Japanese yen, the euro, the British pound and the Australian dollar.
United States dollar
Central bank lending rate: 6,25%
Consumer price inflation: 2%
Formerly considered a ‘safe haven” for investors, the US dollar has been weakening in recent times. One analyst maintained that its economic performance is not as weak as expected and that expectations that the dollar will decline may only be seen in the longer term. Reasons for weakening include a large current-account deficit and high budget deficits.
Euro
Central bank lending rate: 3,5%
Consumer price inflation: 1,9%
The euro has been performing more strongly than the US dollar. One analyst said that it tends to outperform the dollar. Some analysts point to budget deficits in France as a worrying sign and Germany is also said to be battling to keep its macroeconomic fundamentals in a reasonable shape.
British pound
Central bank lending rate: 5,25
Consumer price inflation: 2,7%
The pound is said to take the middle road between the US dollar and the euro. The central bank recently hiked rates as rising housing prices and credit extension pushed up inflation. If Gordon Brown succeeds Tony Blair as prime minister, the United Kingdom is unlikely to join the euro.
Japanese yen
Central bank lending rate: 0,25%
Consumer price inflation: 0,4%
The yen is expected to appreciate as the Japanese economy recovers from its lows in the 1990s. The economy is export-oriented and is running a current account surplus. In this future this structure may make it vulnerable to US economy weakness. Yet Japanese industry has also improved ties with China, raising interest in this sector.
Australian dollar
Central bank lending rate: 6,25%
Consumer price inflation: 3,9%
Like the rand, the Australian dollar is strong during commodity price booms. It is considered to have performed relatively well, to some extent off a weakening dollar. The central bank follows a strict inflation-targeting regime in the face of the inflationary impact of rising housing prices and credit extension.