Forex Investment and Currency Trading

The unprecedented 10% rise of the EUR against USD during December 2008 caused by historically low USD interest rates led to a significant increase in the over-valuation of the EUR against USD. Additional significant interest rate decreases by the Bank of England also led to a strong weakening of GBP against USD increasing the British currency’s under-valuation. With respect to USD/JPY, AUD/USD, and USD/SEK the under or overvaluations were more moderate, but generally reflected the weakness of the USD in these currency pairs.

After continued USD strength in November, December brought a correction to the USD as well as EUR and JPY strength. The EUR gained 10% versus the USD, 16% versus the GBP and 5% versus the JPY by month end, and gains were even larger in the middle of the month. As a result the EUR REER strengthened the most in December, but is only marginally stronger than its 1990-2007 average.

The REERs that declined most on the month were BRL, GBP, PLN and RUB. In Russia, the central bank has swiftly implemented several devaluations of the ruble versus a USD-EUR basket in response to lower oil prices, rapidly declining reserves and an economic slowdown. The other, more freely floating currencies have also declined as the global financial crisis dents local economies and investor confidence after large currency gains in the earlier part of 2008. On a long-term basis (since 1990), the GBP and BRL appear undervalued while the RUB and PLN remain overvalued despite recent adjustments.