Super Currency - A multiCurrency basket the solution to our current crisis?

What currency will have the strongest potential in the short and long terms?
There are several trends in the currency market, which signals that the Norwegian Kroner (NOK) has a potential to be the stronger currency in the short to medium term (18-24 months time).

As the economic downturn ripples globally, the economic development during 2009 becomes a hot debate in the U.S and EU. It will become clearer which currency of USD and EUR will become the global currency leader, or if both will be replaced by other currencies in the mid to long term perspective. IMF;s Special Drawing Rights (SDR) has become a topic of discussions whether it will play a stronger role as global reserve unit, and replace USD.

At the moment there seems to be some appetite to purchase USD debt which can be realized in 24 + months time span, and give strength to other currencies, like Chinese and Japanese currencies. We have to look closer into who is purchasing this debt and what is the potential for these to realize some profit from these assets in medium to long term perspective.

G20 leaders have made clear that for now the dollar's status as the dominant reserve unit remains, but the idea of creating a new reserve currency system based on SDRs has not entirely been discarded. The SDR (Special Drawing Rights) of International Monetary Fund (IMF) has a set of currencies in its basket, which makes it another measure for currency. There has been discussions lately to include more currencies into the SDR basket, however at the moment IMF has not been willing to make any adjustments to the SDR composition. It has also been discussed to use Gold more actively into the SDR. Again IMF together with G20 has not yet adopted any statement on this issue either.

More effective use of gold and gold and forex reserves in this system, could dilute the SDR, which IMF is afraid of at the moment.

The trends of various currencies versus the Norwegian Kroner (NOK) have had a distinct development through 2008 up till March 2009. These trends have been offset in time during 2008, however it seems like the trends have become more synchronized as time has passed, and today it looks like these trends are identical.

The overall picture is that the NOK has strengthened itself towards two major currencies like USD and EUR in the period of August 2008 up till today. This strengthening has seem to found a semi-stable level at the moment, which has increased the value of the NOK vs EUR and USD substantially.

Whether this picture is sustainable or not, is a matter we have to look into at other places than the immediate trends between these currencies. The Norwegian D has kept up better than most nations during these past 6 months time, and was the only one with an expansion during last quarter of 2008. In addition Norway has a net export balance in their national budgets, which is further assisted by their strong currency. However whether the strong currency will counteract the export volumes remain to be seen. Norway’s major export article is oil and gas, together with fish. Oil and gas prices has found a semi-stable level at the moment, which will stabilize the Norwegian budget income level, as for fisheries, this could be another matter as EU is the main market for the fish, and purchase power has been drastically cut the last 6 months and seem to stay that way for at least 24 months time.

Overall, it seems like the NOK will keep its level versus other major currencies for at least 18-24 months time, since U.S actively try to keep USD low due to need for increase in their export to reduce the deficit of their budgets both in short and long term.

EU has kept another profile in their rescue attempt of the EU zone economy, and has not used as an extensive bail out package as U.S has. This has also lead Central Bank of Europe not to cut the interest rate as dramatic as the U.S. has done either.

This can somewhat be reflected in the currency exchange rate between these two.

It is observed that USD vs EUR trend is not stable, despite the fact that the currency level has risen from 0.64 to 0.75 from August 2008 up till end of March 2009.

The cyclic trend rate between these currencies seem to indicate a somewhat unstable element, and macro economic factors need to be understood before any further trend can be predicted.

Let us look at some of the currency exchange trends between the NOK and major currencies like USD and EUR, as well as looking at the relationship between the USD and EUR.

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BHD vs NOK

Development as of August 2008. In the first 3 quarters of 2008 you had a level of 13.5 BD pr NOK, and it steadily increased up till Mid October 2008 when it stabilized at a level around 18.5 BD pr NOK.

The exchange rate has been hovering around 18-19 BD pr NOK up till beginning of March when it dropped to around 17 BHD pr NOK. However it seems like the NOK has strength enough to keep a level around 18-19 BHD in near future.

This is a around 3.48% strengthening of the NOK versus BHD currency.

USD vs NOK

Since BHD and USD is pegged to each other, the same picture as for BHD can be seen in the USD development versus NOK. A base level of around 5.1-.5.5 USD pr NOK existed till late August 2008, when it steadily increased to around 7.0 USD pr NOK in Mid October 2008, and has been at this level till beginning of March 2009, when it made a small drop to around 6.5 USD pr NOK and seem to strengthen a bit.

NOK has strengthened with around 34.6% from 2008 and today.

EUR vs NOK

The development has same trend as in USD vs NOK, however it is delayed as a stable level of around 8 EUR vs NOK existed up till beginning of September 2008, and steadily increased to a peak level in end of December 2008 at around 10 EUR pr NOK. It has since then declined to a level around 8.7 to 9 EUR pr NOK since then, which seems to be a stable level for the NOK.

The Norwegian Kroner (NOK) has increased its value versus EUR with around 10% from the 2008 up till today.

USD vs EUR

Development has the same macro trend as EUR vs NOK and USD vs NOK, however it shows a pre-cursor trend versus the others, as the increase from 0.64 EUR pr USD to a level of 0.79 started already in end July, start of August. This is around 2 weeks before the other movements started.

The peak level of around 0.78-0.79 EUR pr USD held itself to beginning of December as it fell to a local low of 0.70 EUR pr USD in Mid December 2008, and began to steadily increase with a new local peak level of 0.79 EUR pr USD in beginning of March for then again to drop off to a level of 0.75 where it is in end of March. Overall the EURO has strengthened versus the USD with around 17% since 2008 stable level.

The USD vs EUR was a pre-cursor trend for other currencies vs NOK in 2008, however the trends have harmonized and are synchronized as we see it today. Therefore we can not use this trend any longer to predict the exchange rate between USD and NOK, neither EUR vs NOK.

Uncertainty in the global economic picture as the global financial and economic turmoil ripples through the world, makes it impossible to make certain logical predictions when it comes to currency trends in the near to mid term future.

However, if any safe haven is seen from the available economic data, it seems like Norwegian Kroner (NOK) could be a valid candidate to purchase in the short to mid term.

However, it is highly unlikely that this small national economy can play a major global role in the longer term.

The availability to resources needed for primary consumption will in the future play a more and more important role from a currency standpoint of view.

As seen up till now, that oil and gas resource dependencies as well as the control of this, decide lots on how a currency is valued.

In the future, water and certain agricultural resources could play a more important role to how a currency is valued and trusted.

Therefore it is a valid viewpoint to look into whether USD is a currency the world should use in the future, as U.S economic leading role has been questioned in the last 12 months.

There are discussions whether IMF’s SDR should be used more to stabilize the global reserve funds on the longer term.

Adding to the mix is the political dependencies of a nation or region to others, which complicates the currency valuation. At the moment there is hectic movments in controlling currencies, which almost is on the brink of a global currency exchange war. Protectionist trends to protect its own export industries can come more into play as well in this respect.

To give some background and understanding of the SDR, I have included a short summary of the SDR in this article.

The SDR is defined in terms of a basket of major currencies used in international trade and finance. At present, the currencies in the basket are, by weight, the United States dollar, the euro, the Japanese yen, and the pound sterling. The amounts of each currency making up one SDR are chosen in accordance with the relative importance of the currency in international trade and finance. The determination of the currencies in the SDR basket and their amounts is made by the IMF Executive Board every five years.

At the moment the composition valid for the period from 2006 to 2010 is as follows;

USD – 44%

EUR – 34%

Yen – 11%

GBP – 11%

These relationships have been more or less stable since the introduction of SDR in 1981.

There are both pros and cons of using SDR as a global currency reserve, but we will not discuss these here.

SDR versus EURO, NOK and USD

As we can see, the major currencies EURO and USD makes SDR stable versus these two currencies. However as seen versus the NOK, the same trend as for both USD and EURO separately, the same repeats itself for SDR with an increase of NOK value versus SDR in late August, beginning of September 2008. The SDR flattens out versus NOK at around 9 in March 2009.