Strongest currency in the world is...

[Albert0373]

What's the strongest currency in the world?

Posted Oct 22nd 2008 3:22PM by Joseph Lazzaro
Filed under: International markets, Forecasts, Financial Crisis

Here's an icebreaker for your next cocktail party or dinner party. (This one is sure to impress your friends and colleagues even more than explaining the market and economic significance of credit default swaps.)

Q: What's the strongest currency in the world?

Well, let's evaluate the world's major currencies and hone in on the answer.

* The dollar -- For the last few decades, the dollar was the world's strongest currency. After all, it is the world's reserve currency. However, recent history has not been too kind to the dollar -- the dollar's value has declined throughout the decade -- and the near-term outlook does not look good, either. Massive government spending to both end the financial crisis and put the U.S. economy on a sustainable growth track means additional inflation, if not dollar devaluation, is likely. Nix the dollar as the world's strongest currency.

* The British pound -- At one point in history, the sun never set on the British Empire, and the pound was the world's reserve currency. Although the pound has been strong this decade, likely additional interest rate cuts and fiscal stimulus to jump start the economy of Her Majesty's Kingdom, as John Lennon would refer to his native land, means the pound is likely to lose value in the year ahead. Nix the pound as the world's strongest currency.

* The euro -- The euro has challenged the dollar for reserve currency status this decade, and has gained versus the buck for most of that time, but you guessed it: the heavy hand of the financial crisis is beginning to take a toll. For example, Germany alone has approved a 650 billion euro (or $500 billion) bank rescue plan. That's equivalent to the U.S. putting in place a $2.5 trillion plan. Wow. Let's hope Germany doesn't have to use most of it. Of course, the euro zone is more than Germany, but severe stagnation in Germany suggests several more interest rate cuts by the European Central Bank. Nix the euro as the world's strongest currency.

* The Swiss franc - - A legendary safe haven for investors worldwide - - what's safer than a Swiss bank? - - the Swiss franc has built on adequate economic growth in the decade and low inflation to post solid gains versus other major currencies. For example, the Swiss franc is up about 35% versus the dollar this decade. Further, the currency benefits during times of crisis, or when the dollar comes under stress, in a market phenomenon called a 'flight to quality.' List the Swiss franc as a contender for the world's strongest currency.

* The yen - - Think of a place with a housing bubble, reckless lending, ridiculously overpriced real estate, and sluggish economic growth, along with numerous mummified banks (banks that are open, but basically insolvent). True, it sounds a little like the United States in early 2007, but in fact it was Japan from 1986 thru 1990. Add a strong work ethic, excellence in high technology, low defense spending (1%) as a percentage of GDP, and comparatively light exposure to toxic assets, and you have the makings of a strong currency. List the yen as a contender for the world's strongest currency.

The winner? The Swiss franc comes in a close second, but the winner is the yen. That's right: the yen - - the currency with the perpetual zero (or near zero) interest rate. The currency where the nation's central bank will intervene to drive down its value, to prevent its exports from costing too much abroad. The yen is, arguably, the world's strongest currency right now. And the clincher is obvious enough: Japan's large current account surplus and lack of exposure to toxic debts means Japan's economic fundamentals are satisfactory: they certainly compare very well to those of the world's other major economies.

Forex / Market Analysis: Experienced investors can try to capitalize on the yen's strength via buying shares in Japan-based companies, currency diversification, and other tactics.

For others, just use the yen as barometer for how the effort to end the global financial crisis is going. If the dollar is trending higher versus the yen, that's a sign that the plan is working, and most likely the U.S. economy is recovering. If the dollar is trending lower versus the yen, that's a sign of the opposite, and that risk aversion (translation: fear) is increasing.

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[boomstra]

interesting article, thanks!

[Scooterdriver]

Hello: your post regarding currency strengths moved me to join this forum. Being mightily concerned about the future stability of the US economy has me investigating other safe havens in which to place retirement funds. Specifically how does one go about moving U$D's currently in money market funds into, for instance, the Japanese banking system AND not losing the tax deferral on and IRA. Is this possible? Thanks very much for any assistance you may be able to provide, including a referral to someone who is knowledgable in this area.

Scooterdriver in Florida

[Albert0373]

Check out currency baskets and CurrencyShares: (link)