From the US dollar to the pound, euro and bitcoin - which global currency has the best prospects for the year ahead?
Which currency will come out on top in 2018?
The world’s currencies are on an endless roller-coaster ride, their relative values constantly rising and falling in relation to each other, with the occasional stomach-churning drop.
Last year, it was the turn of the US dollar to hurtle downwards, as UAE expats earning dollar-pegged dirhams know to their cost.
The dollar suffered its worst year in a decade, hitting UAE residents with financial commitments in foreign currencies, as their earnings do not travel as far as they did a year ago.
The two big winners of 2017 were the euro, which outpaced almost every other major currency, and the British pound, which was the year’s surprise package, making a partial recovery from the traumatic post-Brexit crash in 2016.
The Japanese yen weakened against most major currencies, while the Chinese yuan and Russian rouble also slipped.
So what does 2018 have in store? Will the dollar surge race back into contention? Will the euro continue to lead the pack? Most intriguingly, what is going to happen to bitcoin, the raciest currency of all?
2017 was a bad year for the dollar, which fell about 12 per cent against the euro to end the year trading at around US$1.20.
It was a similar story with the British pound, with the dollar weakening around 8 per cent to close the year at around $1.35, and also falling against everything from the Mexican peso to Swedish krona.
Some saw this as a sign that US economic might is fading, especially with the IMF downgrading its 2018 growth forecast from 2.5 per cent to 2.1 per cent, well below the 3 per cent targeted by the White House.
However, David Hillier, a currency expert at global transfer service Moneycorp, now expects the US dollar to rebound this year, as president Donald Trump’s move to slash corporate tax from 35 per cent right down to 20 per cent inspires US companies to repatriate trillions of dollars held overseas.
“This will heighten demand for the dollar, increase domestic investment and strengthen the economy, all of which should boost the greenback,” he says.
Sheridan Admans, investment manager at The Share Centre, predicts a strong year for the US economy and dollar as Mr Trump’s tax reforms boost company earnings. “This may force new Federal Reserve chair Jerome Powell to raise rates more aggressively than the market expects, and higher interest rates will lift the dollar,” he says.
After a tricky couple of years, dollar and dirham earners could finally get some respite.
While the dollar may fight back against many global currencies in 2017 it could struggle to recover lost ground against the buoyant European single currency.
Mr Hillier sees another positive year for the euro. “Political instability in Italy and Germany is easing and economic growth has strengthened across the eurozone, while recent free trade agreements with Canada and Japan should also help.”
The single currency should receive a further boost if the European Central Bank starts to unwind its €1 trillion ($1.2tn) monetary stimulus package as expected, Professor Hillier adds.
Charles Purdy, chief executive of Smart Currency Exchange, suggests the euro could dip against sterling if there is progress in signing a post-Brexit trade deal with the UK. “However, political risk in the eurozone is now falling in stark contrast to the politically-charged atmosphere in the UK, so the euro should remain strong.”
The British pound collapsed by 17 per cent after the shock EU referendum result in 2016 but fought back strongly against the dollar and other global currencies, although, it fell another 3 per cent against the euro.
Mr Hillier expects current uncertainty to ease as EU trade talks progress. “Sterling could be one of the strongest performers over the next 12 months, along with the Japanese yen,” he says.
Mr Purdy is also bullish on the pound, especially if domestic wage growth picks up and inflation falls, ending the current squeeze on consumers. “If this encourages the Bank of England to increase interest rates again, that should also help sterling,” he says.
Joel Kruger, market research analyst at LMAX Exchange, puts his neck on the line and predicts the pound will be the big winner in 2018. “Sterling is in a wonderful position to outperform as progress on Brexit is made, worst case scenarios are dismissed and the economic outlook improves,” he says.
However, sterling is walking a tightrope and if EU negotiations go badly it could plunge again. Morgan Stanley recently warned it could fall as much as 7 per cent against the euro this year.
The yen had a tough 2017, falling 9 per cent against the euro and 5 per cent against sterling, while holding steady against the dollar.
However, Mr Hillier expects the currency to rise this year, citing the country’s new-found economic vigour, improved growth and free trade agreement with the EU, finalised last month. “The Japanese economy expanded at an annualised rate of 2.5 per cent in the third quarter of 2017. This, together with expected global growth, should lead the yen into strong bullish territory.”
Mr Purdy says the yen is currently undervalued and its fortunes could be about to change. “An upturn in the global economy should bring higher growth, spending and inflation across the globe, which might encourage the Bank of Japan to loosen its policies.”
However, he warns the world’s third-biggest economy could be hit by political tensions between the US and North Korea, especially if Kim Jong-un continues to fire ballistic missiles over Japanese territory.
The yuan has performed poorly lately and Mr Purdy expects this to continue this year.
Chinese president Xi Jinping is forcing through market-oriented reforms of the country’s foreign exchange rate and financial system, in a bid to expand global adoption of its currency. “However, attempts to drag the renminbi out of the doldrums might be hit by US threats to impose protectionist trade measures on China,” says Mr Purdy.
Mr Hillier predicts the yuan will remain weak against the major currencies. “China will continue to ease foreign investment restrictions, which should offset its capital outflow pressures.”
The rouble has been hit by low oil prices and could be further sunk by interest rates cuts in 2018.
Mr Hillier says President Putin's presence, "will continue to bring stability, but we expect current underperformance to continue in 2018.”
Emerging market currencies did well in 2017, benefiting from the weak US dollar, Mr Hillier says. “They could struggle if the dollar picks up although expectations of global economic growth should improve their outlook.”
He is optimistic over prospects for the Indian rupee and South African Rand. “Both countries look set to lead the emerging market rebound,” he says.
Mr Purdy reckons “the stars are about to align” for the Australian dollar in 2018. “Anticipated interest rate hikes by the Reserve Bank of Australia, global economic growth and improved conditions for commodities like iron ore may drive up the Aussie dollar," he says. "The danger is this may already be priced into the market.”
After an astonishing year in which it rose 1,800 per cent at one point, cryptocurrency bitcoin continued its crazy volatility over Christmas, when its price swung between $12,000 and $17,000.
Mr Kruger says investors should brace themselves for more to come. "There is no denying bitcoin's potential, as it could be a compelling alternative store of value to gold, while the underlying blockchain technology may drive the next wave of global technological innovation.”
However, he says bitcoin’s price has rocketed past the point of rational appreciation and too many questions remain unanswered. “Bitcoin has also benefited greatly from the ultra-accommodative global monetary policy. If interest rates rise in 2018 and we see a flight to safety, that could suck out the speculators, and drag bitcoin back down to earth.”
Fawad Razaqzada, market analyst at Forex.com, says there is little doubt that bitcoin is a bubble, the only question is how far it can go before bursting. “In an uncertain world, the only certainty is that the massive volatility in bitcoin and other cryptos such as ethereum, litecoin and XRP by Ripple will continue in 2018.”
A word of warning
As with every currency, you must limit your exposure to the unpredictable shifts and swings, because even the experts cannot say with certainty what will happen next.
If you thought stock market performance was impossible to predict, second-guessing currency movements is even tougher.
No currency has its own intrinsic value, this can only be valued in relation to another currency, known as its pair.
So, for example, the US dollar can be priced against the European single currency, British pound, Japanese yen, Chinese renminbi, Indian rupee or Venezuelan bolívar, but never on its own.
It is therefore impossible for every global currency to rise – or fall – at exactly the same time. If one rises, another must fall, and vice versa.
David Hillier, a currency expert at global transfer service Moneycorp, says any exchange rate forecast involves not one but three predictions. “You must predict the future value of the two currencies individually and their relative strength to each other. If you call just one wrong, your forecast will be wide of the mark.”
Charles Purdy, chief executive of Smart Currency Exchange, says expats must limit their exposure to foreign exchange swings. “It can be highly costly and unnerving if currency volatility works against you, so you need to manage your risk.”
If sending regular payments overseas consider using a currency transfer service to lock into a favourable rate for one or two years, rather than leaving yourself at the mercy of market swings.