The French and German leaders lacked New Year cheer in their opening messages to their nations as the clocks ticked past midnight into 2012
Nicholas Sarkozy even went so far as to call on the French to be courageous in the face of the euro’s dark days ahead.
In the hope of distracting their populace from their own difficulties they’re taking potshots at the British, making a scapegoat of their ancient rival across the Channel.
But while the hurt eurozone is subdue dominating headlines, the ripple effects are being felt elsewhere. Asian markets in particular are struggling as one of their largest export markets start to shut up shop to unknown goods.
The pace of growth in China subsided towards the end of last year, with a similar picture being experienced by other Asian economies. In fact, Japan (EUREX: FMJP.EX - news) appears to be bearing for another recession, says Michael Derks, chief strategist of FxPro , while the South Korean manufacturers are feeling relentlessly under confident about the year ahead.
“Increasingly apparent over the closing weeks of last year has been the extent to which Europe’s financial demise has terribly infected the performance of those economies that rely heavily on trade,” clarifies Derks.
Last year the Bank of Japan intervened aggressively when the yen became too strong but it is subdue seen as over-valued, so currency experts expect it to fade into 2012.
While the Western world was in festive mode, the Chinese and Japanese made a historic announcement on Boxing Day. The world’s second and third largest economies will descend more of their trade transactions directly rather than converting them into dollars first. At the moment around two-thirds of their trade deals are matured in dollars and China is Japan’s largest trading partner. China already has similar trade deals with Russia and Turkey.
While the yuan has a long way to go before it assumes the status of a world reserve and it is unlikely to achieve it as quickly as this year the signs are certainly there. This latest deal is a notification shot across the bows of the US dollar.
The dollar finished 2011 on a high as it resumed its safe haven status and the world’s banks shunned the euro. But that may not last.
As Chris Towner of HiFX predicts: “The US dollar has benefitted from its status as a liquid haven when everything goes pear-shaped. If we do see some form of stabilisation into 2012 we may see this currency resume its weakening trend, especially as this year is supposed to be a tough ride into the next election.”
The New Year may possibly straightforwardly start with strong growth figures for the US, in stark contrast to the sharp slowdown in the global state generally.
“In an environment so heavily dictated by risk, the dollar is the exact barometer it is misery’s favourite currency,” says William Poole of FC Exchange .
“For now, the dollar will only revive when there is a crisis. With issues in Europe (Chicago Options:^REURUSD - news) unlikely to be resolved in the small-term, this will arguably remain prevalent. Bearing this in mind, dollar strength is likely to be temporary, though it will nearly certainly take up again to be violent, especially given political tensions in the run up to a US election.
“The Fed will, at least, keep rates on hold at 0.25 per cent until mid-2013, with contemporary US strength holding back further asset buys for now. If global conditions manage to improve, 2012 may possibly well be a terrible year for the greenback; if not, we can expect more of the same.”
The forthcoming election is not the only difficulty the dollar faces, as Nick Ryder of Smart (Jakarta:SMAR.JK - news) Currency Exchange points out: “While US data has been improving, the country is yet to push forward with the aggressive spending cuts that the likes of the UK have implemented in the last few years. This will naturally have the effect that data continues to perform relatively well, so I reflect this is not a ‘right’ reflection of the US state. But sterling may possibly perceivably drop into the $1.40’s against the US dollar as the crisis worsens in the eurozone especially if we see a country leave the region.”
And what does 2012 hold for the UK and our European partners? The breadth and depth of the unfolding turmoil in the 17 eurozone countries has taken even the economists by surprise, while the politicians take up again to appear unable to cope.
There have been several moments in the past 12 months when it appeared Europe was teetering on the brink of disaster and disintegration. For a time there were real fears that the eurozone would implode, triggering a meltdown round the world even more severe than the 2008 credit crunch.
As Adam Jordan of Moneycorp points out, the total world needs Europe to stay together, as global markets have invested heavily and trade regularly with the 17 member currency-bloc.
For now, at least, it looks like plans to “save the euro” are beginning to take shape and even if Greece does exit the euro this year, it may not spell the end of the single currency for the other members.
Jeremy Cook, chief economist of World First (Berlin: FC0.BE - news) , predicts: “With all that is going on at the moment, it is simple to reflect that we will see some kind of armageddon unfold in 2012 like disintegration in the currency markets, for example.
“But, we reflect this is highly unlikely, providing we avoid a eurozone implosion that is (and then all bets are off and you better delight in eating mud for dinner).
“The UK state is full of problems at the moment as well, and although we are progressing at a quicker rate than Europe, that is not really saying much. I do not reflect we will see a ‘double-dip’ recession in the UK, but we will in Europe, and this fits in with our estimations that GBP/EUR will grind higher over the course of the next six months to reach a high of 1.23 and 1.28 in 12 months.”
He believes a lasting resolution to the Continent’s debt problems will be found in the shape of a new centralised government and an eventual transition to a United States of Europe.
The problem for sterling is that its fortunes are so closely linked to the rest of Europe, with the eurozone’s difficulties overshadowing any local events.
FC Exchange’s Poole believes that the pound is undervalued but that it has potential to improve.
“A recovery can optimistically be anticipated toward the summer time, especially with the London Olympics in the summer,” he says.
“With the UK state tied to the apron strings of its larger European counterpart, growth will undoubtedly suffer; but, GBP may possibly benefit from the UK’s strong AAA credit rating, remaining supported by flows into its prized gilt market. The UK is now able to borrow as cheaply as Germany, to some extent because the Bank of England is willing to stand behind the market as a ‘buyer of last alternative’.
“The pound’s growing stature as a safe haven currency is certainly warranted, with the UK being the only Western state that has really had its credit rating improved in the last 18 months.”
What should expats do to protect themselves in such times? Ryder advises putting a currency strategy in place such as by forward contracts to secure rates of exchange, and speaking to a currency specialist about the best way forward over the next 12 months.
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