Gold stays solid as currencies soften

In the current economic slump, no country wants a strong currency. Every central bank may be tempted to inflate away their debt. That's good news for gold, the ultimate store of value.

Forecasting currency movements is difficult at the best of times given the forex market's tendency to "charge one way and then the other... with the same fickleness as a teenager follows fashion", as Hugo Dixon of Breakingviews once put it. Throw in the enormous volatility in global markets amid the credit crunch and it becomes even harder.

Nonetheless, one forex theme of late 2009 seems unlikely to have run its course just yet: a strengthening in the dollar and the yen as investors flee risk and the global outlook worsens. Global data are getting uglier and uglier, and while the British government has now made a second attempt to shore up its banking system, and US moves look likely to follow, the banking sector is far from sorted out. With plenty more losses to come from the financial sector, the "overall trend of risk aversion" is set to continue, says Michael Klawitter of Dresdner Kleinwort. He sees scope over the next few weeks for the yen to strengthen to 112 to the euro, from 118 now.

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