After sliding into a protracted bear market starting in the early months of 2002, the dollar started to stage a rally, now looking like a bull run, in and around the second quarter of 2008. Measured over the past 12 months, the dollar, as measured by the dollar index, ranks as the world's best-performing currency.

The economic fundamentals alone help little in explaining this: 3-month US interest rates are now at historic lows (as in most developed economies) of 0.3%, while benchmark 10-year Treasury bonds yield around 2.5%. At the same time, China, now holding the world's biggest foreign exchange reserves, at USD 2 trillion, remains heavily invested in US Treasuries.

DOLLAR INDEX HIGHLIGHTS

Cyclical high

120.20

31 January 2002

Cyclical low

71.33

22 April 2008

Change

-40.7%

Current

85.75

From high

-28.7%

From recent high

-4.3%

The Chinese yuan, which is largely fixed to the dollar, yields better results for Chinese exporters when relatively weak. Given the ongoing strength of the dollar, and thus the yuan, this leaves Chinese policymakers with an ongoing conundrum. Alongside this, much of the action in the so-called global credit markets crisis emanated from the US's private banking sector, leaving the US and the dollar vulnerable to investors sensitive to risk.

But where logic points to a weaker dollar, in practice the opposite has been the case. While the dollar's strength may be somewhat mysterious, there is no question that a number of currencies have been battered, especially over the past 12 months. The huge underperformance of the Russian ruble, while not quite so bad as that of the Icelandic krone, has created something of a crisis for the Kremlin, which has muttered some dark statements on the subject. Russia may hold the world's second-biggest foreign reserves, at USD 368bn, but the ruble has come under attack in the wake of substantially weaker oil prices. The oil exposed Nigerian naira has also performed badly.

Prices in the general commodities complex started to fall at different times, but mid-2008, when dollar oil peaked, can generally be put as the top of the cycle. The dollar's bear market was an important sub theme during the so-called commodities supercycle from 2002 through 2008, given how commodities and priced and traded in dollars. Dollar gold bullion prices, for one, display a powerful inverse correlation with the dollar: all else equal, when one falls the other will rise, and vice versa.

The general performance of so-called commodity currencies, which could include the ruble, has varied widely over the past 12 months. The Swedish krona and Norwegian krone have performed very poorly over the period; the Canadian dollar and New Zealand dollar have been mid-performers, while the Brazilian real and Australian dollar fit within the second top quartile.

The Australian dollar fell by as much as 27% against the dollar, but is now up by around 20% from its lows. The South African rand has performed the best, of all currencies, and second only to the dollar. The rand has made a six month high in the past few days, highlighting the country's 3-month interest rate level of 8.5% and benchmark government 10-year bond rate of around 8%. Shorter term bonds are yielding around 6.5%, substantially higher than in any developed nation.

The South African central bank's benchmark rate was cut (again) on 25 March to 9.5%, after staging a multi year peak of 12% during the second half of 2008. While the rate is widely expected to be cut further, the relative level of South African rates will continue to remain attractive.

Leaving aside currencies tied partially or wholly to the dollar, it is also clear that the Chilean peso, Peruvian sol and Mexican peso have done pretty well against the dollar, outperforming the Australian dollar. Among three of the bigger currencies, the Japanese yen has done well, if not very well; the euro has performed poorly, and the British pound even worse.

For countries where commodities comprise a material or substantial portion of exports, the forward performance of the dollar is going to be of great interest, as ever. There has been a strong bounce in a number of commodity prices of late; dollar prices for nickel, zinc, palladium and silver are all at least 40% higher than recent lows, while prices for copper, lead and platinum have bounced by at least 60%. Should the dollar weaken as risk recedes in the wake of the so-called global markets crisis dimming away, commodity buying will be further stimulated by, all else being equal, relatively lower local currency prices.

SELECTED CURRENCIES

From

From

high*

low*

Dollar DXY index USD

85.75200

-4.3%

20.5%

 

USD/unit

 

 

Unit/USD

South African rand ZAR

0.11223

-19.4%

33.2%

8.91

Indonesian rupiah IDR

0.00009

-15.6%

21.2%

10725.00

Chinese yuan CNY**

0.14637

-0.4%

2.7%

6.83

Hong Kong dollar HKD

0.12903

0.0%

0.9%

7.75

Venezuelan bolivar VEB

0.00047

0.0%

0.0%

2147.30

Jordanian dinar JOD

1.41293

-1.1%

0.7%

0.71

Saudi Arabian riyal SAR

0.26667

-1.0%

0.7%

3.75

UAE dirham AED

0.27225

-0.7%

0.1%

3.67

Japanese yen JPY

0.01007

-12.2%

11.5%

99.29

Slovenian tolar SIT

0.00546

-18.5%

17.6%

183.30

Chilean peso CLP

0.00173

-23.3%

19.0%

576.90

Egyptian pound EGP

0.17753

-6.6%

1.3%

5.63

Peruvian sol PEN

0.32516

-11.9%

6.2%

3.08

South Korean won KRW

0.00075

-25.8%

20.0%

1331.55

Mexican peso MXN

0.07628

-24.8%

18.9%

13.11

Taiwan dollar TWD

0.02958

-10.8%

4.3%

33.81

Singapore dollar SGD

0.66607

-10.4%

3.8%

1.50

Australian dollar AUD

0.72048

-26.9%

19.9%

1.39

Kuwaiti dinar KWD

3.42920

-9.4%

2.0%

0.29

Brazilian real BRL

0.45997

-28.5%

20.5%

2.17

Iran rial IRR

0.00010

-10.4%

2.2%

10015.50

Swiss franc CHF

0.85990

-14.0%

5.7%

1.16

Moroccan dirham MAD

0.11760

-13.9%

5.6%

8.50

Philippine peso PHP

0.02091

-13.4%

4.9%

47.83

Thai baht THB

0.02819

-12.7%

2.7%

35.48

Malaysian ringgit MYR

0.27651

-13.5%

3.3%

3.62

Canadian dollar CAD

0.82372

-19.1%

7.6%

1.21

New Zealand dollar NZD

0.57230

-28.8%

16.9%

1.75

Danish krone DKK

0.17552

-18.4%

6.1%

5.70

Euro EUR

1.30730

-18.5%

6.0%

0.76

Bulgarian lev BGN

0.66845

-19.0%

6.0%

1.50

Czech koruna CZK

0.04893

-29.6%

15.4%

20.44

Indian rupee INR

0.02009

-20.1%

4.8%

49.77

Nigerian naira NGN

0.00675

-20.7%

5.4%

148.25

Turkish lira TRY

0.62031

-28.7%

13.2%

1.61

Argentine peso ARS

0.27214

-18.1%

1.3%

3.67

British pound GBP

1.48052

-26.5%

9.6%

0.68

Pakistani rupee PKR

0.01242

-21.2%

4.1%

80.51

Albanian lek ALL

0.01012

-22.7%

5.3%

98.80

Norwegian krone NOK

0.14891

-26.3%

8.9%

6.72

Polish zloty PLN

0.30537

-38.3%

19.6%

3.27

Colombian peso COP

0.00043

-30.3%

11.1%

2348.10

Kazakhstan tenge KZT

0.00665

-20.5%

0.8%

150.28

Swedish krona SEK

0.11888

-30.8%

10.9%

8.41

Israeli shekel ILS

0.23961

-23.3%

2.0%

4.17

Russian ruble RUB

0.02988

-31.1%

9.2%

33.47

Ukrainian hryvnia UAH

0.12415

-44.0%

21.4%

8.06

Hungarian forint HUF

0.00445

-36.2%

12.5%

224.78

Romanian leu RON

0.30997

-31.5%

7.0%

3.23

Iceland krone ISK

0.00779

-43.9%

16.1%

128.39

** Some currencies are tied, or fixed, fully or partially, to the USD.