Forex experts review the top currency pairs of 2008 by analyzing 5 elements that had the most impact.
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Every year, FOREXYARD analysts come together and discuss the most intriguing events and currencies that made this year special for forex traders. In 2008, it was a tight race between the EUR/USD and the EUR/GBP as both pairs made significant price movements, but in the end, the Euro-Dollar was a no-brainer.
The 5 Reasons the EUR/USD is our story of FOREX 2008:
In general, 2008 began with a discussion about whether the world was entering a recession. Many analysts began predicting the downfall of the U.S. as the world's economic leader, and many still are. Moreover, the last few months have forced economists to reevaluate their data as nothing appeared to make sense once the financial crisis and global recession were fully underway. Here we will try to lay out our explanation for what happened to make the EUR/USD the most interesting currency pair to watch in 2008. Of course there are undoubtedly more explanations than those listed here, we will nevertheless provide only those 5 elements which we feel had the most impact.
5. Automotive Industry Failure. Towards the end of the year, the U.S. automotive giants GM, Chrysler, and Ford each requested a financial bailout from the government as they were at risk of bankruptcy. The debate raged on about whether or not to give any funds to these top-heavy corporations which are years behind in developing fuel-efficient automobiles. As fear grew that the government would not bailout these auto giants, a vital aspect of the manufacturing sector of the American economy, confidence in U.S. markets once again faltered, leading to a sharp appreciation in the value of the EUR against the Dollar. These auto giants have lost their grip on some emerging automotive markets and other car-producing companies around the world are benefiting from their near-collapse. Following these events, the pair then grew back towards the 1.4100 price level, where it currently sits for the start of 2009.
4. The Election of Barack Obama. The euphoria which came with the conclusion of the presidential elections in the United States was impossible to miss. With the conclusion of the George W. Bush regime, and the coming of a new face, optimism reigned supreme throughout world markets. As one of his first moves, Barack Obama announced his economic advisors and rescue plan before addressing any other issue. This focused attention by a fresh regime brought with it vast amounts of confidence in the American economy, thereby strengthening the Dollar even further against the EUR through October and November, falling as low as 1.2300.
3. Falling Crude Oil Prices. Whether the strengthening of the USD in August led to the decline in Crude Oil prices, or whether declining oil prices helped strengthen the USD, is up for debate. One thing for certain is that once the economic recession was underway, the bottom dropped out on the demand for energy. This falling demand has spawned endless debate over the capabilities of OPEC, oil production cuts, alternative energies and the economic recession, among other things. The primary impact was that traders were bailing out of whatever positions they held with Crude Oil and entering into long USD positions as a safe-haven to weather the hardship of the recession, driving its value higher.
2. The Onset of Economic Recession and Subsequent Rate Cuts. While many were forecasting a recession before the start of the year, its onset still made a nasty impact on world markets. Call it the hope and optimism of investors, but when news began to break that a recession was occurring there was shock and dismay as if it hadn't been expected. The psychological impact of knowing a recession was underway was enough to push investors in and out of currencies unpredictably as they sought out a safe-haven for their funds. One such safe-haven was, and always has been, the U.S. Dollar. Starting in August, when the recession was fully realized, the USD began to strengthen against the EUR as a result of it being the primary safe-haven.
Also as a result of the recession, and of the sporadic price movements of world currencies, governments began taking steps to ensure market liquidity and boost investor confidence. The primary impact was a reduction of global interest rates to the point where there are almost zero interest rates, which has further weakened currencies but stabilized economies to some extent. The impact of these rate cuts on the EUR/USD depended on which central bank was slashing rates, but the movement which came afterwards made the market an intriguing spectacle to watch.
1. The Sub-Prime Mortgage Crisis. The burst of the real estate bubble in the United States sparked off a chain reaction which many economists had feared. All of the unregulated sub-prime mortgages, which had been issued during the heyday of the growing housing bubble, were put into default moments after housing prices began to come down. International securities backed by these mortgages then lost most of their value, which meant a loss of capital and liquidity for many banks. This then resulted in the multiple failures of international bank giants such as AIG and Citi Group. Leading up to this crisis, the USD went bearish as investors lost confidence in American markets, pushing the pair to the 1.6000 level from April to July.
Looking forward to the coming year, one can't help but wonder what will happen. The recession is far from over; interest rates are close to zero and still dropping; Crude Oil prices have yet to stabilize; Obama hasn't yet taken office; and the auto industries may still file for bankruptcy early in the year. Regardless of all this, optimism remains. History has taught us that economies work in cycles. While the global economic system may be in contraction, investors must remember that it isn't permanent. What goes up must come down. But when it comes to economics: what goes down will eventually come back up.
The one market in which investors can still make money is in the forex market. Stocks may fall, companies and banks may fail, but the one resource that will always be in demand is money.
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