World's Weakest Currencies

By Bruce Einhorn

From the Arctic coasts of Iceland to the Southern Ocean shores of New Zealand, the financial crisis has humbled many of the world's currencies. As risk-averse investors have rediscovered the U.S. dollar, they have swiftly pounded down currencies that until recently had been highfliers. Especially hard-hit have been countries such as Australia and South Africa with large mining industries, as slower economic growth has popped what had been a steadily inflating resources bubble.

There are some holdouts against the dollar's rise. In Japan, the yen is up 13% year-to-date against the greenback. China's yuan is up 6.8%. Having a strong currency has its disadvantages, especially for exporters in both countries. Japanese giants like Sony (SNE), for instance, are now less competitive against Korean rivals, as the Korean won has dropped 27% against the dollar this year, making it one of the weakest of all the major currencies. The Chinese currency's appreciation is causing problems for manufacturers in coastal China's industrial centers, where many recession-hit factories are in danger of going out of business.

Brazilian Real
Down 18%
Brazil's real has tumbled 18% this year. Other Latin American currencies have been hurting, too. The Mexican peso, for instance, is down 15%. Government intervention has helped slow the decline, though. And with over $200 billion in foreign currency reserves, Brazil's central bank can continue to keep selling dollars for a while.

Indian Rupee
Down 19%
Until recently, India's currency had been rising steadily, causing headaches to the country's big IT outsourcers like Infosys (INFY) and Wipro (WIT). The rupee's sudden turnaround should help those companies become more competitive, since their Indian employees won't be as expensive for their dollar-paying customers. But the weaker rupee might hurt Indian companies that have been actively seeking deals overseas such as Tata Motors (TAMO), the automaker that agreed to pay Ford (F) $2.8 billion for Jaguar and Land Rover in March.

Norwegian Krone
Down 20%
The end of the oil bubble has contributed to the big fall in the Norwegian currency. The Bank of Norway's recession-fighting efforts haven't helped, either. The central bank cut rates twice in October. The latest, a 50-basis-points cut on Oct. 29, put the overnight deposit rate at 4.75%, its lowest in a year. And with plenty of room for more cuts ahead, the downward pressure on the krone is likely to continue.

British Pound
Down 21%
After sinking to a six-year low on Oct. 27, the pound briefly staged a modest recovery, climbing 6% by Oct. 30. Stabilization of equities markets after several volatile weeks helping the currency. But with the Bank of England cutting interest rates to fight the economic downturn, a strong comeback for sterling will be difficult.

New Zealand Dollar
Down 23%
The New Zealand dollar was one of the major beneficiaries of the yen carry trade. Now, with the crisis diminishing interest in borrowing yen to buy currencies benefiting from high interest rates, the Kiwi is one of the biggest victims. New Zealand's economy is heavily dependent on exports of products such as wool and dairy, and the currency is therefore also suffering from the end of the global commodities bubble that has pushed down global demand.

Australian Dollar
Down 24%
For five years, the Australian dollar couldn't be stopped. Earlier this year, the Aussie (which at the start of 2002 was worth only U.S. 51¢) was approaching an important psychological threshold of parity with the U.S. currency. Those days are long gone, though. After a long economic boom, the Royal Bank of Australia is now in recession-fighting mode. The central bank on Nov. 4 announced a 75-basis-point cut in interest rates, following a full percentage point cut in October.

Turkish New Lira
Down 25%
The new aversion to risky emerging markets has depressed the Turkish new lira. That's hurting Turkey's effort to fight inflation, which the government on Nov. 3 announced was up 2.6% in October. Turkish leaders are currently in talks with officials from the International Monetary Fund about renewing an agreement that lapsed in the spring providing the country with access to $10 billion in stand-by funds in case of financial strain.

South Korean Won
Down 27%
A month ago, South Korea's currency was down 33% for the year, making it the world's worst-performing major currency. Since then, though, the won has staged a mild comeback thanks to government measures to support the currency. Although the central bank has used billions of dollars to defend the won, Seoul still has a big pool of foreign-exchange reserves (over $240 billion as of August) to help the currency from falling further.

South African Rand
Down 32%
Fears of a severe global recession have taken their toll on the South African rand. The currency had a terrible October and in early November fell to a seven-year low. Manufacturing is slumping, and consumer spending is falling. Moreover, since South Africa's export economy is heavily dependent on gold and other resources, slower growth worldwide is likely to lead to slumping demand for South African products—and South African currency.

Icelandic Krona
Down 50%
No country has suffered more dramatically from the global financial crisis than Iceland. The country is on the brink of bankruptcy, with Norway announcing on Nov. 3 it was prepared to lend Iceland $635 million on top of the $2.1 billion the country is receiving from the IMF. The Icelandic currency's collapse and high inflation led the central bank in October to raise interest rates 600 basis points, to 18%.

(Source: Businessweek)